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Sunday, June 1, 2014

We know it snowed, so stop bashing Q1

Tony Paradiso

I wish the government would stop trying to estimate economic growth for quarters gone by. Every time it does, things get more dire.

Leave well enough alone. Everybody knew the first quarter stunk. It snowed every other day and it was as cold as … well, you know. ...

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I wish the government would stop trying to estimate economic growth for quarters gone by. Every time it does, things get more dire.

Leave well enough alone. Everybody knew the first quarter stunk. It snowed every other day and it was as cold as … well, you know.

Not content with the previous revision that lowered growth to a paltry 0.1 percent, the Commerce Department now tells us the economy actually contracted by a full percentage point. What next? The banks failed and no one noticed?

My prognostication for annual growth of 3 percent is pretty much out the window.

“Severe weather conditions had a deeper impact on first-quarter economic activity than previously estimated,” said Robert Hughes, a senior research fellow at the American Institute for Economic Research.

No kidding, Bob.

The main culprit for the latest revision was inventories. A buildup in private inventories juiced the economy in the third quarter of 2013, and the piper was paid in the beginning of 2014. Inventories shaved 1.62 percentage points from GDP growth. The initial estimate was for a 0.57 percentage point haircut from inventories, so this change alone accounted for the 1.0 percent contraction.

Hopefully, this is the last time the government takes the time to tell us Q1 was miserable.

In other news …

There was an interesting article in the Wall Street Journal about wages. The focus was on the “other minimum wage,” which the article defined as the minimum an employer can pay workers and avoid requirements to pay them overtime. That’s an annual amount of $23,600.

We briefly touched upon this during the discussions on the minimum wage. The theory is that employers take advantage of workers by paying $23,600 and then requiring them to work an unreasonable number of overtime hours. I have no doubt that there are employers who do just that. Still, it’s a hard argument to make that this pay threshold should be part of the minimum wage discussion.

Assuming a 40-hour workweek, $23,600 is the equivalent of an $11.35 per hour pay rate. Assuming the normal two-week annual vacation, an individual would have to work an additional 23.5 hours per week to lower their pay to the equivalent of the minimum wage of $7.25.

Are there people who are willing to work 63 hours a week for $23,600? I’m sure there are. But I can’t imagine that the problem is rampant. I do suspect that at companies run by less than ethical employers, workers may be expected to work 50 or 55 hours a week. But even at 55 hours a week, the average hourly wage would only be reduced to $8.25.

Also, consider that some percentage of these $23,600 jobs are of the corporate “steppingstone” variety where employees are provided the opportunity to advance by proving their skills and commitment.

In other words, it’s more complicated than the average politician can comprehend. But that hasn’t stopped President Obama from championing the cause. He’s quite adept at appearing to solve problems without actually solving anything. I think that skill is a degree program at Harvard.

Now that I’ve gotten my gratuitous shot at the president out of the way, I can share the more interesting part of the wage article. According to data from the nonpartisan research organization Tax Policy Center, 7.08 million people earned $23,000-$25,000 in 2013. That is more than for any other $2,000 increment.

That’s clear evidence of employers abusing employees, right? Not quite. The next two largest segments are $19,000-$21,000 and $29,000-$31,000, each at about 6.7 million workers.

But that isn’t the interesting part, either. What is interesting was the most common salaries. Unlike in the retail world or in real estate –where ending in 5s and 9s is preferred – when it comes to pay, people like round numbers. When wages are divided into $1,000 increments, the numbers spike on every increment that is a multiple of $5,000.

The most common salary is $30,000. In fact, an employee is five times more likely to be paid $30,000 than $29,000 or $31,000. The next most common salaries are $40,000, $25,000 and $20,000. We like round numbers so much that workers are more likely to earn $100,000 than any amount from $71,000-$99,000.

There may be hope for the millennials yet. According to a new study by the Brookings Institution, more than 50 percent of people ages 21-36 have their savings in cash. That compares with 23 percent for all other age groups. And millennials have only 28 percent of their assets in stocks.

This is contrary to what most financial advisers would recommend. Typically, the younger you are, the more risk it’s recommended you assume. But millennials are having no part of that strategy, and with good reason. They’ve seen their parents muddle through two recessions in the last 14 years. They’ve also witnessed some of Wall Street’s most egregious shenanigans in the dot-com and housing bubbles.

Congratulations to the younger generation. Now all you have to do is learn how to talk face-to-face with your fellow man again and perhaps civilization as we know it will continue.

Tony Paradiso is an author, professor, entrepreneur, radio and TV commentator, and marketing and management expert. His website is at www.tonyparadiso.com.