Wednesday, 19 October 2016

Now you see it, now you don't

Yesterday's inflation data held no great surprises. Everybody expected a pretty low number for inflation during the September quarter and for the year to September, and they got it: 0.2% for the quarter, 0.2% year on year.

Cue for hand wringing over the Reserve Bank yet again allowing inflation to stay too low.

But here's the thing.

We know the overall headline rate of 0.2% can be split into two bits, the bit that happens in the 'tradables' world of exports and imports, and the 'non-tradables' bit that happens in our own economy, the likes of the local authority rates, the doctor's bill, or the school fees. And we know that the overall 0.2% outcome was made up of tradables prices falling over the past year by 2.1%, while non-tradables prices rose by 2.1%.

The Reserve Bank has sod all influence over the tradables bit, except to the extent that it might manage to control the exchange rate, which influences how much of the world inflation rate comes through to us. But it (and any other central bank) tends not to be able to steer exchange rates terribly well, so in practice whether the Reserve Bank is on top of things comes down to whether it is steering non-tradables inflation to where it needs to be.

So let's have a look at that non-tradables inflation in more detail. Here it is.

The blue line is annual non-tradables inflation, which is running at 2.1%. So remind me again how the Reserve Bank hasn't got inflation back up to 2%, the midpoint of the 1% to 3% band it's supposed to be focussed on?

But (you'll say) that 2.1% rate of non-tradables inflation isn't all it's cracked up to be. It's not really 2.1%. It's inflated, innit, by the housing market. And you're right, it is. But if you take out the cost of new houses, you get the green line, non-tradables ex housing. It's running at 1.8%. That's not too bad, either, if you're supposed to be aiming at 2%.

Course (you'll reply), there are other housing-market-related things still being counted in that non-tradables ex housing line, in't there? Rent. The cost of keeping the house in good running order. The rates. And again, you're right. So let's purge the non-tradables inflation of every damn house-related thing - the cost of a new house, the rent, yadda yadda yadda.

That gives you the red line, non-tradables less anything to do with a house. On that basis non-tradables inflation is running at 1.25%. That's short of the Reserve Bank's 2% focus, so you could beat them about the ears if you felt like it. On the other hand, it's at least crept back into the 1% to 3% band, and it's clearly headed in the right direction. Every one of these measures has been on the rise all year.

One of the big mysteries of macroeconomics recently has been, where's the inflation gone? Why hasn't it come back like it used to when things pick up? That's a big topic, and everyone from Janet Yellen at the Fed to Philip Lowe, the new governor of the Reserve Bank of Australia have been having a crack at it, and I'll come back to it one of these days.

My thought today, though, is this: maybe it's actually come back, and we haven't noticed.

Don't be too 'asty - update

On Monday I wondered about the sense of the government tightening up on migration inflows at a time when businesses appeared to be finding it hard to get the people they need to keep growing.

Since then, while researching something else, I've discovered that there's even more evidence saying that the government ought to go carefully. It's the latest ANZ jobs ads count. As the chart below shows, the unemployment rate has been steadily falling while job ads have been steadily rising: you couldn't find a clearer illustration of how short businesses are of staff, and of the need for more people from overseas to keep the cycle going.

And you don't have to take my bleeding-heart-liberal instinctively-pro-free-movement-of-people word for it. Here's the ANZ's own take:
With firms in a mood to expand, skill shortages, rather than demand, are set to become the key brake on activity.
Those damn Chinese, keeping our economy going for us. Honestly.

I've also sat through today's Parliamentary Question Time. Sometimes it's moronic: patsy questions from government backbench MPs to their own side, or, even more egregiously, as we had today, patsy questions from one backbench opposition MP to another. Sometimes it's cynically oppositional: you know full well that the Opposition MP asking the question would, if in office, have done exactly what he is criticising the government for doing.

Today hit new lows, with ugly questions about immigrants supposedly taking jobs from our own youngsters. Never mind that the questions are hopelessly adrift of the true state of the labour market, where (as the ANZ data show) any sentient carbon based life form can get a job if it wants. But it's also ratcheted the immigration debate another moral notch lower. I didn't think, when I first came to New Zealand, that I'd ever see its elected representatives channelling Farage, Le Pen, or Trump.

In a race to the bottom, we've got some good runners.

Monday, 17 October 2016

Don't be too 'asty

The government has tapped the brakes on migration flows, for what commentators have assessed as essentially political reasons (see, for example, Duncan Garner on Stuff or Fran O'Sullivan in the Herald). 

But as Fran said, "The balancing act that Key has to apply is how he gets across the fact that New Zealand is dependent on immigration and ensures the doors to skilled people remain open". And that's getting a bit trickier, as some data today suggested we may be more imminently dependent on ongoing strong immigration flows than you might imagine.

The data were in the latest BusinessNZ/BNZ Performance of Services index, which showed the services still growing at a handy pace, though a tad less strongly than in August. In its commentary, the BNZ has flagged the possibility that difficulty in finding staff could be starting to hold firms back from continuing  to expand. In the graphs below, the bank has juxtaposed the composite index covering both services and manufacturing (the 'PCI') with GDP growth - there's usually a close fit - and said there's "the hint, from the PCI, that growth may be slowing". And below that, it put up the latest readings from the NZIER's Quarterly Survey of Business Opinion, which as the NZIER said, showed that "Firms report increased difficulty in finding labour, and this may have limited the extent to which firms could increase headcount over the past quarter. The difficulty in finding labour is particularly acute for skilled labour, with shortages at levels not seen since December 2007".

Sure, migration is a touchy issue in a lot of places right now, and one's that's backing generally economically responsible governments into places they wouldn't normally go: in the UK, for example, the Conservative government recently flirted with the tackily unpleasant idea of "naming and shaming" British companies that hire people from overseas (they've since had to backtrack). 

All I'd observe (as I've said before) is that the labour market is rather tighter than you would think from a 5.1% unemployment rate. Mucking about with the supply of staff from overseas might make political sense. But if it threatens to get in the way of the already limited ability of businesses to find the people they want, it's not likely to be economically costless.

Thursday, 13 October 2016

A picture is worth...

What is it about graphs?

We're supposed to be living in a new world of 'dataviz' journalism where bright young things are taking data and doing clever stuff to it and turning it into attractive visualisations with insight and oomph. And some people are, like the folks at But as far as I can tell nobody in the major mainstream or social media has run with any of the graphs that the Reserve Bank's John McDermott included in his speech on Tuesday, 'Understanding low inflation in New Zealand'.

So here are some of the more interesting ones.

This is where inflation (or the lack of it) has been coming from, by sector.

Ex sin taxes on fags, and ex anything to do with housing (admittedly a fairly large 'ex' to 'ex'), there's precious little inflation around. Some of that is pure luck (world oil prices). And some of it, I'm pleased to say (wearing my 'competition is good for you' hat), is down to stronger competition in areas like air travel and (especially) telecommunications.

Here's another way of looking at it - roughly speaking, how much of our inflation is coming at us from world markets ('tradables') and how much we're creating in our essentially domestic markets ('non-tradables').

You'll notice that we're not generating much inflation of our own. John's not convinced that there's anything long-term about this, and reckons that there's cyclical stuff happening that explains it. Me - I'm not too sure. I suspect that the GFC put the fear of God into many business decision-makers and households, and the impacts haven't worn off yet: we could have inherited a change in behaviour that is more 'structural' than cyclical. It could be that greater caution about raising prices or asking for a pay rise helps explain why we're raising prices more slowly than we would have in previous cyclical upturns. We'll see.

Another interesting one is this age breakdown of net migration

You might have had some preconception, especially given the publicity around the government's recent move to tighten up on 'family reunion' style bring-in-your-mum-and-dad-too immigration, that there was a lot of it about. There is some, and the number of older people coming in has been rising, but the reality is that by far the largest parts are younger people, and people in their prime earning years. John raised it in the context of different age breakdowns having different effects on inflation: more younger people (as at the moment) have a smaller impact on inflation than more older people.

And finally, there's this, which shows the Reserve Bank's history of trying to guess where the Kiwi dollar is going next (in overall trade-weighted value).

There will be those who will use this to poke the RBNZ in the eye, and I'm kinda bemused myself. It's odd that everywhere you go, from central banks to surveys of businesspeople, people (and I've done it too) keep making the same rather mechanical forecast: if the exchange rate is going up, it'll go up a little more, but then fall, and if it's going down, it'll drop a bit more, and then go up.

But it's a seductively easy thing to do, especially if you believe the exchange rate has wandered away from the One True Level where it needs to be, and that sooner or later it will revert to it. Easy - yes. Accurate? Not so much.

Friday, 7 October 2016

Roll up, roll up

At last year's NZ Association of Economics annual conference, I found a flier publicising Victoria's Master of Professional Economics programme.  And it gave me a bright idea.

I'd been thinking for a while about that awkward Catch 22 situation many economics - and other - graduates often face, where they can't get their first job without some experience and they can't get the experience without that first job. It applies all over the place across all sorts of areas - competition, regulation, banking, consultancy, investment management.

So I thought there could be a useful course which would give students both the traditional academic rigour and some practical hands-on exposure to one of the staples of many working economists' lives - figuring out where we are in the business cycle, and making enlightened stabs at where the cycle is headed next. And I got in touch with Dr Adrian Slack who is the director of Victoria's graduate programme in professional economics to see if Victoria would be interested in running with the idea. We talked it through and put together an idea of what it would look like.

The upshot, I'm pleased to say, is that Adrian has piloted the proposal through the approval system and it's up and running. MMPE523, 'Business Cycle Analysis and Implications' is good to go: as noted here, Prof Viv Hall and I will be taking it over the fences for the first time this coming summer trimester (November '16 - February '17). It'll cover the economic theory of cycles up to the present-day state of post-GFC reassessment, the history and causes of cycles in New Zealand - an area where Viv, with the Reserve Bank's John McDermott, is the pre-eminent cycle-dating guru - through to the practicalities of assembling the "where are we now" data, forming a coherent analytical view of what's going on, and building your own two-year-forward set of GDP forecasts. We're also planning on getting in some third parties (public and private sector) who can talk about their experience in building and using cyclical models and forecasts.

So the next time that dreaded job interview question comes round, and the student is facing, "So, tell me, have you done much forecasting?", the answer will be, "Well, yes, I've been quite pleased with how my GDP forecasting model has been going. And it's got something you might be especially interested in - as part of the exercise I've built this little model of...".

If this would suit anyone you know, spread the word. Adrian's the go-to man for more info.

Friday, 30 September 2016

Auckland and Canterbury housing: what next?

The latest statistics on building consents came out this morning, and I've been keeping an eye on them mainly because Auckland housing consents at the start of this year actually declined for a while - a deeply worrying development, given that consents even before they dipped were not keeping pace with new demand for accommodation, let alone eating into the backlog of existing unfulfilled demand.

Here are the latest data for Auckland dwelling consents. I've included the 'actual' data and the 'trend' data': the 'trend' version is Stats' best effort to abstract from the (quite considerable) month to month volatility and to show us the underlying picture. I've gone back to 1995, partly because that's where the 'trend' series starts in Stats' database and partly to put the current rate of building into context.

It's good news as far as it goes. That dip has gone away, and it's onwards and upwards in recent months. It's still not clear why we had that earlier dip: some people I've spoken to said that developers were waiting to see the shape of the Auckland Unitary Plan, and maybe that's true. But it's somewhat at odds with the recent rises, which predate the publication of the Plan (it went public on July 22 and was only signed off by the Council on August 19). Perhaps there'll be another hiatus as the Plan is appealed, or maybe developers aren't fixated on the Plan at all: we'll have to wait and see.

Another possibility is that the trend-detecting algorithm at Stats had a temporary hissy fit and is now back on track, though the downside of that thought is that if it detected dips when there weren't any, maybe it's finding surges when there aren't any, either. And yet another possibility is that the month to month numbers (especially for apartment blocks) are just too volatile to find a reliable signal in all the noise, even if your trend-spotting software is up to scratch.

But in any event, let's bank it - as far as it goes, which isn't far enough. You can see for yourself that this recent rate of consenting is getting closer but still isn't back up to the levels of the early 2000s, and on a per capita basis it's still well adrift: urban Auckland's population was around 1.2 million in the early 2000s, and it's nearer 1.5 million today.

And it's not just an Auckland problem, either: nationally we seem to have had increasing difficulty in getting homebuilding activity up to the level it needs to reach. This chart (from Stats' info release today) shows that we are currently consenting some 30,000 dwellings a year (and that's inflated quite a bit by the Canterbury rebuild), but we were regularly clocking 30,000 and more in the early 1970s when the population was only around 3 million compared to today's 4.7 million. There are more sophisticated ways of measuring it, but I doubt if they'd shake the basic conclusion, which is that we need to get the supply side of the market operating a good deal more responsively.

I hadn't been following the Canterbury rebuild numbers closely: I had a vague impression that peak rebuild was somewhere around now. And indeed it is, on these figures from the June Building Activity Survey: the total value of building work in the Canterbury region is still going up a bit, but looks like it is plateauing.

Within the overall total, the housing rebuild is actually past its peak, which was back in late 2014 and early 2015, while the non-housing rebuild is still growing.

Today's dwelling consents figures for Canterbury show the same picture: consents also peaked back in the second half of 2014.

There's still a lot of housebuilding going on in Canterbury, and self-evidently the job can't be finished, but hopefully the recent modest drop in activity is a signal that the bulk of the demand has been met and there's less left in the pipeline still to do. 

The other thought that emerges from these data is that as far as the impact on overall GDP growth is concerned, the boost from the Canterbury rebuild has largely run its course. Ideally the construction sector would swing more or less smoothly from meeting demand in Canterbury to meeting demand in Auckland, though as noted above our national ability to meet demand has become progressively creakier. We could even see further GDP growth if the Auckland build started to become larger than Canterbury's. But overall it's beginning to look as if we're going to find something else to do with our resources if we want to keep 3% growth going.

Monday, 26 September 2016

Good books - September '16

Economics reading has been a bit thin on the ground recently, so instead let me pass on some third party recommendations. Diane Coyle at The Enlightened Economist got asked to recommend "some general reading for someone about to start a masters in public policy" and came up with this reading list. It's excellent: I've read four of them (Reinventing the Bazaar, Who Gets What and Why, What Money Can't Buy: The Moral Limits of Markets, and Economics Rules), and they were all very good, so I reckon you can trust the rest of the list as well.

And on the strength of this fine review by Deirdre McCloskey in Prospect magazine, I've pre-ordered my copy of economic historian Joel Mokyr's latest, A Culture of Growth: The Origins of the Modern Economy. Out on November 8, the hardback was only $40.71 (postage included) from The Book Depository in the UK. Mokyr's earlier book, The enlightened economy : Britain and the Industrial Revolution, 1700-1850, is also very good, if you'd like an update on where modern thinking has got to on the genesis and progress of the Industrial Revolution in the UK. If you're an economics student in New Zealand and you're interested (as you should be) in economic history, you're going to have to take this DIY route since, apart from a new course AUT is bringing out, there's virtually nothing offered on the economics syllabi anywhere (as I documented here).

Politics: I enjoyed Michael McManus's Edward Heath: A Singular Life. It's not a conventional biography - it started life as an intended collection of tributes and anecdotes from people who knew Heath but morphed as the material accumulated and McManus decided to make something bigger out of it - but it is still fascinating. Towards the end (p366) McManus summarises Heath as a "decent, shy, sometimes frustrated, often difficult, rarely charming, wantonly brusque, proud public servant who always believed in fairness and who loved his country".

People certainly remember the brusqueness and the rudeness - for a politician, he had a remarkably low EQ, and whatever lay behind his odd personality is still not obvious - and he became an even more awkward cuss when he was rolled by Margaret Thatcher. But they don't remember the better bits. Purely on merit, he got to the top of the socially hidebound Conservative Party, the first leader to be elected rather than anointed behind the scenes by the well-connected bigwigs: charmingly, he got nicknamed 'Grocer' by the toffs for his middle-class background. He had an admirable contempt for political spin and artifice, which was one reason he despised Harold Wilson (with, as history goes by, ever clearer justification). He had a life outside politics (talented musician, internationally competitive sailor). And he believed in attempting to reach agreement by principled negotiation in good faith - a fine ambition, and effective in piloting the UK into the European Community, but doomed to founder domestically in the dire industrial relations of the time.

The hardline union leaders of his day would have done better to meet him half-way, as they belatedly discovered from 1979 onwards, but they did for Heath, and the last of any legacy he might have claimed was swept away with Brexit. There are elements of tragedy to his story: they won't leave you feeling hugely sympathetic to the man - even the author, who worked for him, couldn't get that far - but you'll likely end up with a fairer overall view.

History: I was a Great War buff in any event, and didn't need the centenary of the Somme to have a go at the new books out commemorating it. I've finished Hugh Sebag-Montefiore's Somme: Into the Breach, and it's a good, solid introduction to what is still one of the bywords for wholesale slaughter. It also marked the New Zealand Division's blooding on the Western Front, at Flers in September 1916: you'll see the name on WW1 memorials all over New Zealand. Things would get worse again at Passchendaele in 1917.

By happenstance, Sebag-Montefiore uses the NZ Division as an example of the prevalence of venereal disease, of war crimes (killing prisoners) and of kangaroo court martials: he says they were equally prevalent in other units, but I can't say I was best pleased. Fortunately you'll get a better overall picture of our guys from Glyn Harper's Dark Journey: Passchendaele, the Somme and the New Zealand experience on the Western Front, where equally by happenstance I point you to how our chaps (and the Aussies) stopped the last great German offensive of the war in 1918 when General Gough's Fifth Army was running away. And if you want a classic example of Kiwi understatement, it's hard to beat the comment (reported on p467) of one infantryman, burying some of the dead after the battle for Bapaume in September 1918: "when there was only two of us left of our lot, I began to think: This is not too good".

Everyone should read a few of these front-line focussed books - it's still hard to go past Martin Middlebrook's 1971 classic The First Day on the Somme, or any of Lyn Macdonald's books, such as 1915: The Death of Innocence or They Called it Passchendaele - but at some point you'll inevitably start to think higher level thoughts about overall strategy and the meaning of it all. There are many thousands of choices, but one good entry point is J P Harris's relatively recent (2008) biography, Douglas Haig and the First World War.

Glyn Harper worries that much of the Great War, and New Zealand's part in it, is being forgotten, and only partly because Gallipoli overshadows everything else: "It is a tragedy that the events of Passchendaele are largely unknown to the majority of New Zealanders (p138)...Though the struggle to capture the town of Bapaume is a relatively unknown battle in New Zealand's military history, it does not deserve this obscurity. It was one of the most costly and hard-fought battles undertaken by the New Zealand Division on the Western Front (p490)". In these days of 'peace studies' and content-lite curricula, he's probably right. But with so many good books now available, at least there's ample opportunity for people to give themselves the education they should have received in school.

On a lighter note, the great Robert B Parker, who died in 2010, set the gold standard for the modern American private eye story with his long-running Boston-centred Spenser series, with its classic themes of honour, manhood, loyalty, courage, and resistance to being pushed around. Dip in anywhere if you've never tried them: they're all good. The franchise has carried on, initially I think because there were unfinished books in the hopper and more recently because some experienced writers have been able to turn the handle on the formula. I just finished one of these recent ones, Ace Atkins' Robert B Parker's Kickback, about the evil connections between a lock-'em-up judge and a privatised prison operator. Excellent, and indistinguishable from the original.

Peter Corris is fortunately still with us, with his Sydney-based Aussie private eye, Cliff Hardy. The latest in this wonderful atmospheric series is That Empty Feeling, a flashback to corporate shenanigans in the Sydney of the 1980s. And if you liked that, you'll also like Philip Temple's Jack Irish series, set in Melbourne, and probably the non-Irish books Temple has written, too.

Thursday, 22 September 2016

Leave well enough alone

No surprises from the Reserve Bank in this morning's review of the Official Cash Rate - it was held at 2.0%, as widely expected (in this survey, for example).

It's been steady as she goes over the ditch, too, not just in the sense that the Reserve Bank of Australia also stood pat at its latest decision, and left the Aussie equivalent at 1.5%, but also in the sense that, earlier this week, the Aussies re-committed to their inflation targetting regime, which is broadly similar to ours. They're not identical - the Aussie target is "keep consumer price inflation between 2 and 3 per cent, on average, over time" and ours is "keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint", for example - but they're clearly close cousins. The occasion for the Aussies staying with what they've got, by the way, was the change at the helm of the RBA, with incoming governor Philip Lowe taking over from the outgoing Glenn Stevens.

It would be nice to think that our local politicians will see the Aussies signing on for more of the same and draw the right conclusion - inflation targetting is still the mainstream serviceable model for monetary policy - but of course they won't. As sure as eggs is eggs, come to election time we'll have some of the political parties (and on past form, nearly all of them) promising to 'do' something about our monetary policy regime.

It's not an entirely discreditable exercise: some folks are beginning to wonder if there mightn't be something better. The Economist, for example, ran an editorial piece in its August 24 edition, 'When 2% is not enough: The rich world’s central banks need a new target', canvassing two ideas: raising the current target (typically 2% or so in many developed economies) to 4%, or moving on from inflation targetting to targetting of nominal GDP. The Economist argued that "A 2% inflation target is ill-suited to the rich world today. Doubling it would be an improvement, but targeting nominal GDP would be better still. Time for a new era".

It wasn't the most convincing thing the Economist has ever run. It argued, for example, that "credibly enacted", a 4% inflation target could be a goer, but "credibly enacted" magicks away the whole of today's biggest challenge: if central banks can't hit 2% today, despite throwing unprecedented firepower at it, what makes anyone think they can hit 4% tomorrow? Putting that aside, however, it's nonetheless plausible that there are at least some potential candidates for the Next Big Thing in monetary policy.

But as the magazine also said, "Changing targets is not something policymakers should do lightly; their credibility depends on stability". Exactly right: our current system may not be perfect, and as everyone knows we and other countries have been struggling to get inflation to where it should be, but unless there's a very clear benefit to change, net of the considerable credibility costs involved, we ought to do what the Aussies have just done, and stick with the programme.

Not that I expect this unasked-for advice will make a blind bit of difference to the next sets of election manifestos, but as I said last time I looked at some research on these issues, plea to the pollies is this.
Back off. We've got a working system that's done what it said on the label. It takes forever for new monetary systems to get bedded in and for people to get their heads around them: a central bank's credibility takes decades to lock down. We've got there: let's stay there.