Friday, October 31, 2014

The New, Do Nothing Washington

Updated December 31, 2014

Now that we are at the end of 2014, let's take a brief look at how much time America's legislators actually spend doing the business of the nation and how much they accomplish.

Here is a calendar showing the days that the House sat/will sit in the Second Session of the 113th Congress:

That's a total of 112 sitting days in 2014 or an average of 9.3 sitting days per month.  You'll note that during the ISIS and Ebola crises that are destined to bring the United States to its knees, the House has been rather empty.

Here is a calendar showing the days that the Senate sat/will sit in the Second Session of the 113th Congress:

That's a total of 193 sitting days in 2014 or an average of 16.1 sitting days per month.

Since the Resume of Congressional Activity is not yet available for the Second Session of the 113th Congress, let's look back one year to the First Session of the 113th Congress to see what was accomplished by the same cast of characters in the period between January 3, 2013 to January 3, 2014, starting with the House:

Days in Session: 160
Time in Session: 767 hours 33 minutes
Average Session Length: 4 hours 48 minutes
Pages of Proceedings: 8138
Pages of Proceedings per hour of sitting: 10.6
Public Bills Enacted into Law: 56
Total Bills Passed per day of sitting: 0.35 
Bills Introduced: 3810
Yea and Nay Votes: 299

Now, let's look at the Senate:

Days in Session: 156
Time in Session: 1095 hours 12 minutes
Average Session Length: 7 hours
Pages of Proceedings: 9124
Pages of Proceedings per hour of sitting: 8.33
Public Bills Enacted into Law: 17
Total Bills Passed per day of sitting: 0.11
Bills Introduced: 1894
Yea and Nay Votes: 291

Please note that in both cases, there were no private bills enacted into law.

Here for your perusal is the Resume of Congressional Activity for the First Session of the 113th Congress:

As a bit of background, according to the Congressional Research Service, the 2014 pay for Members of Congress is $174,000 annually.  The Speaker of the House makes $233,500 and the President pro tempore of the Senate  and the majority and minority leaders in the House and Senate each make $193,400.  On top of that, Representatives and Senators are allowed to make up to 15 percent of the annual rate of basic pay for level II of the Executive Schedule for federal employees ($26,550 in 2013) in outside earned income.  Outside earned income cannot include the following:

"...a Member may not receive compensation for affiliating with or being employed by a firm, partnership, association, corporation, or other entity providing professional services involving a fiduciary relationship, except for the practice of medicine; allowing his/her name to be used by such a firm, partnership, association, corporation, or other entity; practicing a profession involving a fiduciary relationship; serving as a member or officer of the board of an association, corporation, or other entity; and teaching without prior notification to, and approval from, the House Committee on Ethics, in the case of Representatives, or the Senate Select Committee on Ethics, in the case of Senators."

Both Representatives and Senators are not allowed to accept honoraria.  There is, however, no limit on the amount of non-salary income that members can retain from their corporate dividends, investments or profits.

Now that we have some background, let's look back at the First Session of the 80th Congress, Harry Truman's famous "Do Nothing Congress" and compare their activities to that of the current Congress, again, starting with the House:

Days in Session: 144
Time in Session: 686 hours 2 minutes
Pages of Proceedings: 5739
Pages of Proceedings per hour of sitting: 8.4
Public Bills enacted into law: 275
Private Bills enacted into law: 94
Total Bills Passed per day of sitting: 2.56
Bills Introduced: 4831
Yea and Nay Votes: 84

Now let's look at the Senate:

Days in Session: 143
Time in Session: 807 hours 36 minutes
Pages of Proceedings: 6150
Pages of Proceedings per hour of sitting:7.6
Public Bills Enacted into law: 120
Private Bills enacted into law: 37
Total Bills Passed per day of sitting: 1.1
Bills Introduced: 1924
Yea and Nay Votes: 138

Here for your illumination is a screen capture showing the Resume of the 80th Congress for both the First and Second Sessions:

When you compare what American taxpayers are getting for their Congressional dollar today, you can see that even when compared to the 80th "Do Nothing Congress", the 113th Congress was mired in partisan bickering.  While roughly the same number of bills were introduced in both sessions and the number of sitting days was comparable, the "do nothing" Congress was able to enact nearly ten times the number of bills into law than the current crop of Washington's best and brightest.  One thing that the current Congress is better at than their peers in the 80th Congress, however, is the number of pages of proceedings issued per hour of sitting.

Mediocrity would seem to be the slogan of the new "Do Nothing Washington".  Perhaps if the honourable Members were to spend less time fundraising and more time doing what they actually get paid to do, things would get done.

Thursday, October 30, 2014

Why Has GDP Growth Been So Modest?

Updated January 2015

We all know that there is a close relationship between personal consumption and GDP growth as shown on this graph from FRED:

As the decades have passed, personal consumption has made up an ever-increasing component of GDP, rising from a low of 58.5 percent in 1967 to its current level of 68.2 percent.  That said, if we focus on the tail end of the curve showing the data since the end of the Great Recession in June 2009, this is what we find:

It's obvious that the personal consumption component of GDP has not risen since the end of the Great Recession, unlike its pattern in since the late 1960s.  Although consumer spending has risen, its contribution to GDP has not grown in the past five and a half years.  This has put downward pressure on GDP growth rates.

Let's look at a brief essay by Daniel Aronson and Andrew Jordan, both at the Federal Reserve Bank of Chicago that may explain why economic growth has generally been so modest since the end of the Great Recession.  In their essay, the authors look at the relationship between real wage growth and the labor market.  They note that there is a close relationship between the share of the labor force that is medium-term unemployed (five to twenty-six weeks of unemployment), the share that is involuntarily working part-time (less than 35 hours weekly) and real growth in wages (after inflation). 

Let's start with this graph showing real hourly wage growth between 1979 and 2914:

With recessions shaded grey, we can quickly see that in the period between 1991 and 2001 during the jobs boom, real wage growth was substantial and remained above zero until around 2005.  After the 2001 and 2008 - 2009 recessions, real wage growth has stalled or fallen.

Here is a graph showing short-term unemployment (less than 27 weeks), long-term unemployment (more than 27 weeks) and involuntary part-time workers as a percentage of the workforce from 1979 to June 2014:

In the past, the national unemployment rate has been a useful predictor of real wage growth.  As unemployment rose, real wage growth fell.  This relationship has broken down over the past five years.  Given that the unemployment rate fell from a peak of 10 percent in 2009 to 6.1 percent in June 2014, had the historical relationship between real wage growth and unemployment held, real wage growth would have been 3.6 percentage points higher by mid-2014 than it was.

Calculations by the authors show several key things for average wage earners since the end of the Great Recession:

1.) a one percentage point increase in the short-term unemployment rate results in a change in real wage growth of -0.4 percentage points.

2.) a one percentage point increase in the long-term unemployment rate results in a change in real wage growth of -0.38 percentage points.

3.) a one percentage point increase in the medium-term unemployment rate results in a change in real wage growth of -0.71 percentage points

4.) a one percentage point increase in the part-time for economic reasons underemployment rate results in a change in real wage growth of -0.40 percentage points.

As well, the authors' calculations show that the negative impact on real wage growth is higher for those that earn less meaning that the impact of the slack labor market on real wage growth is highest on those who earn the least.

The authors calculate that if labor market conditions were the same as what they were in the period between 2005 and 2007, average real wage growth would have been one-half to one percentage point higher in June 2014 than it was.

While the current job market has improved since its low point after the Great Recession, its current weakness, particularly for those that are medium- to long-term unemployed and those that are underemployed for economic reasons, is having an impact on wage growth.  Without growth in wages, consumers are forced to either take on debt or reduce spending.  In our consumer-oriented society, so much of economic growth hinges on never-ending increases in consumer spending and until consumers feel that they are wealthier or at least see some real growth in their wages, it will be more difficult to achieve the economic growth rates that we were accustomed to in the past.

Wednesday, October 29, 2014

Are Mutual Funds Being Haunted by Shadow Banking and Illiquidity?

In the October 2014 edition of the IMF's Global Financial Stability Report, there is a very interesting paragraph buried on page (ix) of the Executive Summary:

"The share of credit instruments held in mutual fund portfolios has been growing, doubling since 2007, and now amounts to 27 percent of global high-yield debt.  At the same time, the fund management industry has become more concentrated. The top 10 global asset management firms now account for more than $19 trillion in assets under management. The combination of asset concentration, extended portfolio positions and valuations, flight-prone investors, and vulnerable liquidity structures have increased the sensitivity of key credit markets, increasing market and liquidity risks. " (my bold)

The IMF is concerned that there is a growing share of illiquid debt instruments in mutual fund portfolios, particularly from the shadow banking system.  In case you were not aware of the shadow banking system, it is a $71 trillion system that operates outside of the normal banking system.  For example, the sector includes hedge funds, private equity funds, pension funds, business development companies and real estate investment funds that lend/grant credit to businesses.  The shadow banking term can also apply to the unregulated activities by regulated banking institutions  Shadow banking grew as a result of the banking regulatory system, a set of regulations that require banks to have minimum capital levels, regulations that do not apply to the shadow banking system.  Estimating the exact size of the global shadow banking system is difficult; the Financial Stability Board (FSB) estimated that the global shadow system peaked at $62 trillion in 2007, declined to $59 trillion during the Great Recession and grew to reach $67 trillion in 2011.  According to the FSB's Global Shadow Banking Monitoring Report for 2013, by the end of 2012, the shadow banking system reached $71 trillion.  By size, this is about half of all banking system assets and 117 percent of global GDP.  Year-over-year growth rates in shadow banking in 2012 ranged from -11 percent in Spain to +42 percent in China.  Here is a pie chart showing the share of global non-bank assets by jurisdiction at the end of 2012 (the last year data is available until the FSB's 2013 report released in November 2014):

The IMF goes on to note that there is growing concern about market liquidity, an issue that is related to the shadow banking system.  This concern about liquidity stems from the desperate search for yield in this near-zero interest rate environment that has resulted in increased inflows into many mutual funds.  Mutual fund managers have been able to satisfy this hunger for yield by issuing debt and buying bonds to and from higher risk clients.   In the United States, mutual funds can invest up to 15 percent of their assets in illiquid securities, an investment vehicle that is not allowed in Europe.  Since 2007, mutual funds, ETFs and households have become the largest owners of United States corporate and foreign bonds, accounting for 30 percent of total holdings.  Here is a graph showing the rising ownership of corporate and foreign bonds by households (in blue):

Here is how much growth has been experienced in assets under management for mutual funds and ETFs, showing the increasing level of United States high yield bonds (in blue):

As we all know, mutual fund holders are generally allowed to redeem their holdings for cash, part of the promise made to investors.  A problem could arise in times of "market stress" (i.e. when central banks exit from unconventional monetary policies or when geopolitical risks increase) when it is impossible for mutual funds to meet the demand for redemptions because the underlying corporate debt assets are not liquid or that the cost of redemption is too high, resulting in a capital loss for the fund.  In simple terms, the redemption terms offered by the investment funds may simply not match the liquidity of the underlying assets.

Here is a bar graph showing how vulnerability to distress in the banking sector has grown for bond mutual funds since 2008 (in dark blue):

Not only is there a problem with debt issued by American corporations, mutual fund allocations of emerging market fixed income products grew from 4 percent in 2002 to 10 percent in 2012 with most of that going to China.  Here is a graph showing how bond allocations have moved to emerging markets over the years since the end of the Great Recession:

This is yet another consequence of the search for a reasonable yield.  Mutual fund managers are concentrating their assets in emerging markets where higher geopolitical risk results in higher yields.

Let's close with this quote from the GFSR:

"Six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies to support demand, encourage corporate investment, and facilitate balance sheet repair. Monetary accommodation remains critical in supporting the economy by encouraging economic risk taking in advanced economies, in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking, in the form of increased portfolio allocations to riskier assets and increased willingness to leverage balance sheets. Thus, accommodative monetary policies face a trade-off between the upside economic benefits and the downside financial stability risks. This report finds that although the economic benefits are becoming more evident in some economies, market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed." (my bold)

The search for yield and the resulting investment in illiquid or less liquid higher risk fixed income assets could prove to be troublesome for mutual funds once investors realize that the world's central banks are putting an end to their current monetary policy.  As central banks, particularly the Federal Reserve (the leader of the pack), begin to unwind their positions and allow interest rates to rise, the risks involved in their experiment will begin to see the light of day and some investors will pay a very hefty price.