An update on yield curve dynamics

 - by New Deal democrat

So I submitted this wonderful piece to Seeking Alpha yesterday morning, and figured I would just link to it today. But as in the best laid plans of mice and men, somehow it reverted to a draft without ever being reviewed by the site's editors, which means it isn't up there yet and there is no big economic news today. 

Sigh.  So in the meantime, consider this ....

The bond market is behaving in totally typical fashion in response to the Fed raising interest rates.  Typically the yield curve doesn't invert because long duration yields come down to short duration yields. Rather, *all* durations of yields rise. It's just that shorter duration yields rise faster, and ultimately overtake longer duration yields.  Here's the relevant graph for the past 40 years:  

If we think of interest rates as "the cost of renting money," then the economy slows because that cost increases across all time frames, and enough producers and consumers decide to put off "renting money" in order to purchase things that the economy slows down or goes into reverse.

Now here is a close-up on the same information since the beginning of this year. I've added +0.25% to the 2 year bond (red line) since my cutoff line for where I rate the yield curve as "neutral" is when the 2 year yield is within 0.25% of the 10 year yield:

In the above graph, we see that (a) both lines are rising, and (b) the red line overtook the blue line beginning in August. It took long rates rising to new 7 year highs above 3.10% to interrupt that dynamic.  But if you look to the far right, you can see that in the past couple of days the lines are converging again.  As of this morning the 2 year yield is only 0.27% less than the 10 year yield, even with the 10 year yield at 3.15%.

If the recent trend continues, we will probably see an inversion in the 2 to 10 year yield spread by St. Patrick's Day next March.  I already see enough signs out there to have forecast a slowdown in the economy by roughly midyear next year. If I'm correct, the outstanding question will be whether the Fed reacts by lowering interest rates again quickly, or else stubbornly sticks to its "normalization" rubric and thereby brings about a recession. This in turn may depend upon whether producer price inflation rises again and leaks over into consumer prices.

A follow-up on the reasons for prime age labor force non-participation

 - by New Deal democrat

Here is something interesting I found in an article by staffers at the Kansas City Fed a couple of weeks ago.  

They broke down the 25-54 prime age labor force participation group for men into 10 year slices, by education, and by reason for not participating in the labor force. They focused on men, because including women confounds the results by the secular societal change whereby women entered the labor force en masse between the 1960s and 1990s.

First of all, it turns out that the prime decade driving the increase in non-participation is the 25-34 age group:

That finding is amplified by breaking down each prime age decade by education level:

Across all age levels, the biggest jumps by far in non-participation were among those with high school degrees and some college, and especially so among the youngest decade.

Next, they broke down non-participants by the reason given for non-participation, using the monthly household survey that is issued as part of the jobs report. The Census Bureau asks non-participants if the reason they are not in the labor force is disability, family care, education, retirement, or other:

In accord with the above, among the 25-34 age group, the biggest jump in the reason for non-participation was education. Interestingly, among the 35-44 and 45-54 age groups, the big increases were family care and retirement(!). The rate of those claiming disability actually decreased (a big surprise). These increases were similar across all levels of educational attainment.

I have two takeaways from this: first, there is likely an "education arms race" going on, where ever-increasing levels of education are deemed necessary in the competition to obtain good-paying jobs. Seventy-five years ago, a high school degree is what was necessary. Forty years ago it was a college degree. Now it may take a graduate degree. Ultimately this is a self-defeating waste of resources, and worth its own lengthy article.

Second, this is evidence for the "child care cost crunch" I wrote about several years ago. As the cost of daycare has increased, and wage growth has decreased, an increasing share of households are finding that it makes more sense for one spouse -- in this case, "Mr. Mom's" -- to stay home and raise the kids.

Weekly Indicators for October 15 - 19 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Between them, high interest rates and tariffs are affecting the readings in all three timeframes.

As usual, clicking on the link and reading the post puts a little coin in my pocket, as well as giving you an up-to-today read on the economy.

September existing home sales: yet another poor housing report

 - by New Deal democrat

While existing home sales are roughly 90% of the entire housing market, they are much less important as an economic indicator because they do not have the knock-on effects of construction improvements, and less of the landscaping and indoor improvements, that new homes do.

But they certainly do help us track the trend. And like housing permits and starts, and new home sales, the trend has not been good this year.

In September, existing home sales were at a 5.15 million annualized trend, down for the sixth month in a row, down YoY, and close to a 3 year low. Further, existing home sales have not made a new monthly high since last November, 10 months ago. The 3 month average has not made a meaningful new high since April of last year.

Here's what the last year (excluding this month not shown) looks like:

If there was a silver lining in this report, it was that the YoY increase in the median price of an existing home, at 4.2%, while still outpacing wage and household income growth, decelerated from last month's 4.6% level, and was well below the 5%+ YoY readings from earlier this year Because prices have pronounced seasonality, the YoY metric is the only way to track them. My typical workaround, that if the increase declines by more than 1/2, then the top has probably been set, is valid for this number, but of course we would need to fall below a 3% YoY increase for that to kick in.

Inventory is now increasing, and I expect that to last until sales decline enough to drag prices down with them.

Bottom line: this is another negative report from the housing sector. We still have September new home sales and Q3 fixed residential spending to be reported next week for the picture to be complete.

Tracking Trump's tariffs: US vs. Canadian rail loads

 - by New Deal democrat

Let me start out by saying that there is an excellent case for the US imposing a VAT ("value added tax") similar to those enacted by Canada and European countries in order to recapture the losses due to far lower wages in China and other developing countries. Additionally there is an excellent national security rationale for not entering into"free trade" agreements with authoritarian governments who will use the benefits to build up their militaries. Not that this is what Trump is doing, of course.

In any event, I've already noted that the weekly rail report by the AAR seems like an excellent way to track the impact of Trump's tariffs, especially via intermodal units which are used for ocean shipping. This week I happened on another excellent usage: comparing US vs. Canadian real loads, both of which are monitored weekly by the Association of American Railroads.

To the point, here's what year to date growth in US (first graph) and Canadian (second graph) rail loads looked like 2 months ago:

Note that carloads, especially of various agricultural products, were reasonably comparable in the two countries.

Now here are the same two graphs updated through this past week:

With the exception of forest products and grain, YTD comparisons are still positive in Canada.  

But look at what has happened in the US. All of the YTD and YoY weekly comparisons have collapsed, and the latter have turned completely flat or negative.

This is incontrovertible evidence that Trump's tariffs are hitting US agriculture - and transportation - hard.

September JOLTS report: a jobs market moving from thriving to hot

- by New Deal democrat

Tuesday's JOLTS report once again confirmed the very good employment report from one month ago, with two series making all-time highs and one an expansion high:

• Quits ust below their all-time high set one month ago
• Hires made a new all-time high
• Total separations made another new expansion high
• Layoffs and discharges spiked back to average levels for this expansion
• Job openings made yet another all-time high

Let's update where the report might tell us we are in the cycle, remaining mindful of the fact that we only have 18 years of data. Below is a graph, averaged quarterly, of the *rates* of hiring, quits, layoffs, and openings as a percentage of the labor force since the inception of the series (layoffs and discharges are inverted at the 2% level, so that higher readings show fewer layoffs than normal, and lower readings show more:

To put this in context, during the last expansion:

• Hires peaked first, from December 2004 through September 2005
• Quits peaked next, in September 2005
• Layoffs and Discharges peaked next, from October 2005 through September 2006
• Openings peaked last, in Spril 2007

By contrast during and after the last recession:

• Layoffs and Discharges troughed first, from January through April 2009
• Hiring troughed next, in March and June 2009
• Openings troughed next, in August 2009
• Quits troughed last, in August 2009 and again in February 2010

Here's what the four metrics look like on a monthly basis for the last five years: 

Job openings, quits, and hires have all surged higher this year, with openings virtually "on fire." .
Next, here's an update to the simple metric of "hiring leads firing," (actually, "total separations"). Here's the long term relationship since 2000 through Q3 of this year: 

Here is the monthly update for the past two years measured YoY:

In the 2000s business cycle, hiring and then firing both turned down well in advance of the recession. Both are still advancing. The YoY% rate of growth had been decelerating, but has accelerated again.  

Finally, let's compare job openings with actual hires and quits. As you probably recall, I am not a fan of job openings as "hard data." They can reflect trolling for resumes, and presumably reflect a desire to hire at the wage the employer prefers. In the below graph, the *rate* of each activity is normed to zero at its August 2018 value:

As I noted when I first presented this graph, while the rate of job openings is at an all time high, the rate of actual hires has only just reached its normal rate during the several best years of the last, relatively anemic, expansion, and is below its rate at the end of the 1990s expansion. Meanwhile quits are just below their best level of 2001 (at the end of the tech boom).

that the *rate* of actual hiring is below that of the anemic Bush expansion is very telling. My take is that employees have reacted to the employer taboo against raising wages by quitting at high rates to seek better jobs elsewhere.

In summary, the August JOLTS report shows an employment market that is moving past thriving to downright hot, but a market that continues to reflect a failure of wage equilibrium, My expectation is that this will last a few more months, and then start to cool down early next year as a slowdown begins to take hold.