Wednesday, November 22, 2017

The yield curve: we're not DOOMED yet

 - by New Deal democrat

Here's another item to ponder while I am away this week....

An inversion in the yield curve (i.e., shorter length bonds yielding higher than longer term bonds) has (with the exception of 1966) been a reliable sign of an oncoming recession, at least since the late 1920s. Mind you, the curve did NOT invert at all during the later 1930s, 1940s, or early 1950s, despite a number of recessions, including the big 1938 recession, taking place.

But a yield curve inversion = bad, no doubt about it.

There's been a lot of chatter recently about the yield curve flattening, with a few of the usual DOOOMish suspects calling it recessionary even now.

Hold your horses.

Here's a long term look at the 10 year minus 2 year yield curve:

Note that an inversion has been a reliable signal of a recession beginning in the next 12 to 24 months.

But we're not even inverted now!

Here's a look at the yield curve for the last 5 years:

The trend from peak to peak since the beginning of 2014 has been a slow tightening on the order of 0.4% to 0.5% per year. If that general trend were to hold, we're 18 to 24 months from an inversion.

Even if we use the steeper trend decline that began from the peak last December, we're still 10-12 months from an inversion.

But let's suppose we get at least a partial inversion 6 months from now.  That would signal a recession 12 to 24 months afterward -- in other words, 1 1/2 to 2 1/2 years from now. That's 2019 or 2020.

In short, even if the yield curve gives an accurate signal this time around, it would still mean that the expansion has a ways to go.  Sorry, but we're just not DOOOMED yet.

Tuesday, November 21, 2017

The Large Increase in the LEIs is a 1-Time Event

Yesterday, the Conference Board released their latest LEI numbers, which reported a large increase.  As the above table shows, this was mostly caused by a big contribution from initial unemployment claims.  They recently rose and fell due to hurricane season:

The top chart is the composite 4-week moving average, which spiked after the hurricanes hit the U.S.  The middle chart shows initial claims for Texas; the bottom chart shows the same data for Florida.  All three indicate that the large decline is a temporary development that will return to more normal, late cycle readings next month.

Oil: uh-oh?

 - by New Deal democrat

I'm away this week, so while I'm not commenting on the few bits of incoming data, here's an item to ponder.....

With respect to commodities, it is said that "the cure for high/low prices, is high/low prices."  Thus $4/gallon gas a decade ago brought forth renewed exploration, greater efficiency, and increased use of alternate fuels.

Almost two years ago gas bottomed out at about $1.65/gallon. I would expect new exploration to slow down or stall, less of a drive for efficiency and for alternate fuels.  The SUV seems to be king again, and hybrids like the Toyota Prius have not increased their market share.

So is the beginning of another secular increase in the price of gas in the works?

Here's what prices look like since the big secular low at the beginning of 1999, showing the bottom in January 2016 and a slow upward trend since:

Here's the YoY% change in prices:

Typically gas prices decline in the autumn into winter, as vehicle mileage declines -- but this autumn prices have increased.

I don't claim any special knowledge about the oil and gas industry. Still, given that the 1974, 1979, 1990, and 2008 recessions were caused in part by or at least included gas price spikes, it's something to keep an eye on.  Should gas prices continue to rise, and inflation with them, the Fed is likely to raise rates enough to invert the yield curve.

There is No Reason to Worry About the Junk Bond (JNK) Sell-Off

     Over the last few weeks, the fixed-income world has been focusing on the junk bond sell-off.  Looking at the charts we see it's not the Armageddon event many have predicted.  Let's start with the daily chart:

Prices dropped to ~36.25 before rebounding.  They are also slightly above the 200-day EMA.  The EMA is about to give a buy signal.

     Turning to the weekly chart, we get this picture:

Yes, prices broke support by moving through the trend line connecting the late February and early August lows.  And the MACD has been grinding lower.  But it's been moving lower since 3Q16.  And all the shorter EMAs (10, 20 and 50 week) are all moving higher.

     The JNK sell-off is timed with the debt situation in Venezuela.  But that's a very small part of the market.  However, it has taken up a great deal of the headlines, which has contributed to the sell-off.  

     Unless we see other bearish headlines in this space, this is really nothing to be concerned about.

Saturday, November 18, 2017

Weekly Indicators for November 13 - 17 at

 - by New Deal democrat

My Weekly Indicators post is up at

The yield curve has flattened considerably, as the bond market treats a December rate hike as a near certainty, but it remains a positive.

John Hinderaker Renews His "Tax Cuts Pay For Themselves With Growth" Nonsense

It's been awhile since John "Everything I wrote about economics for an entire year was wrong" Hinderaker has written about economics.  The respite has been glorious.  But now that Republicans in the House have passed a tax bill, ol' John has to tell us that they will lead to glorious growth.

I have one word for him: KANSAS.  Sam Brownback tried this over the last 5 years in his state and it failed.  Miserably.  For more on this, please see Menzie Chen's writing over at Econbrowser.

But more to the point, the whole "tax cuts made the 80s the most amazing economic growth miracle since the beginning of time pure trope.  Let's look at the overall pace of growth:

Above is a chart from the FRED database (which John still can't seem to locate) that shows the Y/Y percentage change in real GDP.  On the really funny side, notice that the pace of growth under Carter was higher on a Y/Y pace than Reagan.  John never seems to mention that.  And yes, growth in the 1980s was good.  But after the initial acceleration (which is more a function of statistics than actual numbers) growth occurred at/near/around its historical trend.

So, was this a function of tax cuts?  The Kansas experiment tells us that, no, it probably wasn't.  Clinton raised taxes in the 1990s and the economy still grew.  Bush II cut taxes and growth declined.  Taxes were over 90% during the 1950s and 70% in the 1960s, yet we still had solid growth.  So, between the pure experiment of Kansas and the historical record, we can say that tax rates don't seem to have the impact we thought.

So, what caused growth?  Let's start with this chart:

Notice that when the Federal Reserve raises rates (usually to slow inflation), the economy slows.  Imagine that.  Its' almost like there's a relationship there or something.

And as for Saint Ronnie Reagan, remember that he loved to spend government money just like a real Keynesean.  However, he liked to spend it on the military:

Ron primed the pump with a massive increase in defense spending.  So, Uncle Ronnie loved to spend money just like the tax and spend liberals.

So, what really caused growth?

I present you with the labor force participation rate, a statistic that Republicans magically found during Obama's presidency.   Econ 101: potential GDP = population growth+productivity growth.  More people + an increasing ability to produce more stuff equals how much we're going to grow.  During the 1980s and 1990s two demographic trends hit: the baby boomers began their prime earnings years and women increased their economic participation.  The combination was powerful.  It's also why we're now slowing: women are leaving the labor force and the baby boomers are retiring.

None of this matters to John.  He's been economically illiterate since the beginning of time and still continues to write about the subject.  But for others, this data might be important.


Friday, November 17, 2017

Housing slowdown looks like it is ending

 - by New Deal democrat

I'll have a much more detailed report next week at, but here's the bullet point summary of this morning's housing permits and starts report:

  • single family permits made a new expansion high
  • single family starts made a new expansion high
  • total permits were just shy of their expansion high from last winter
  • the three month moving average of total starts, which smooths out volatility, made a new expansion high
  • the number of units for which a permit has been issued, but which have not yet been started, made a new expansion high

In short, this was an excellent report. It looks like the slowdown in housing that was brought about by the increase in mortgage rates one year ago is abating, as the demographic tailwind continues to assert itself. Meanwhile YoY interest rates are potentially within days of being lower, which will be a boon.

More next week.

Thursday, November 16, 2017

Industrial production and real retail sales evidence of strong underlying trend

 - by New Deal democrat

A couple of weeks ago I wrote:
Dallas Fed and the Chicago PMI both improved even more from September to October: ... As a result, even taking into account that these have been outperforming industrial production this year, it is likely that manufacturing production when it is reported for October several weeks from now will be a positive, and most likely slightly better than last month's.
The average of the four non-southern regional Fed manufacturing indexes was +20. The Chicago PMI was 66.2, which translates to +32.4. The average was roughly +22, which translates to +.4 in the industrial production manufacturing index. Even subtracting a few tenths of a percent still gave a positive number.

Well, overall industrial production, and the manufacturing index, both came in strong for October:

While some of this may be a hurricane related rebound, the above regional calculations show that the underlying national trend remains quite positive.

A similar situation obtains with regard to real retail sales.  The overall number was up +0.1%:

But even if we subtract out autos, given the need to replace ruined vehicles, real retail sales while not higher, maintained the big increase from September:

So the Doomers can't use the hurricanes as an excuse. Right now the economy is hitting on almost all cylinders (wage growth for nonsupervisory workers still stinks).

Bonddad's Wednesday Linkfest

EU GDP + .65 M/M, 2.5% Y/Y (Eurostat)
EU IP -.6% M/M. +3.3% Y/Y (Eurostat)
UK annual inflation at 3% (ONS)
Dallas Fed chief considering December hike (FT)
The UK interest rate curve is inverted at the short-end (FT)
11 trillion of negative yielding  debt (FT)
US Set to become major oil producer (FT)
Yellen says markets expect too much guidance (Marketwatch)
Sydney welcomes "Ferry McFrryface" (AP)
LA imports up (CR)
Long-term job declines in US manufacturing (Econbrowser)