Tuesday, November 24, 2015
- by New Deal democrat
I have a new post up at XE.com discussing this morning's revisions to Q3 GDP.
While the revision was positive, the news regarding long leading indicators was significantly mixed.
Monday, November 23, 2015
- by New Deal democrat
One long leading indicator has turned from green (positive) to yellow (caution): mortgage rates.
Since middle class wages peaked in the 1970s, the ability to refinance debt at lower interest rates has been an important coping mechanism. Particularly since the 1980s, whenever
- real wages have stagnated,
- the effects of refinancing debt have dwindled, and
- the ability to cash in an appreciated asset has stalled,
the middle class has retrenched by curtailing its debt load, thereby bringing about a recession.
(You can read a post from me on this, dating from the blogosphere's primitive era, here.)
As the below graph shows, each of the last 3 recessions has occurred after a period of 3 years (red) where mortgage rates have failed to make a new low:
The failure of mortgage rates to make a new low is not the *signal* for a recession. Rather, it has been a necessary predicate.
As the below graph of mortgage rates and refinancing applications from Mortgage News Daily shows, we just passed the 3 year marker since rates made a new low during the week of November 19, 2012:
As a result, refinancing applications are stuck near their lows. The boost to consumer spending from the last bout of refinancing has run its course.
In the 1980s and 1990s, the great long term bull market in stocks gave rise to the ability to cash in that asset. But stocks have failed to make a new high in 6 months and have been basically flat all year:
In the 2000s, of course, it was home equity that was cashed out. The below graph of the Case Shiller index shows that, in an apples to apples comparison of pair counts, house prices have gained little this year, and are well below their 2006 highs:
Fortunately, largely due to the collapse in gas prices, real wages have made new highs several times this year:
On a YoY basis, gas prices have continued to decline. And we are now finally at the point in the labor market recovery where some upward pressure on wages should start to materialize.
Through the 3rd quarter, there is no sign of household debt retrenchment:
So there is no sign of any imminent downturn. And so long as real wages continue to improve, the economic expansion should continue.
But the fundamentals underlying improvement to the lot of the middle class have moved into the yellow, "caution" zone.