Tuesday, January 15, 2019

The consumer nowcast and the short term forecast

 - by New Deal democrat

First, a quick site note. I am blogging from a new device, and since I am a fossil, that means the transition is far from smooth. In particular, posting of graphs is going to be minimal until I can get a new method working properly. Also, I’m going to be traveling later this week, so don’t be surprised if there is no content for a couple of days. Finally, because the “Blogger” platform is very 2000s, and not supported any more, don’t be shocked if the best way to deal with it turns out to be transitioning to a new website.

No new data economic today, but the Fed did publish data last week that allows me to update one of my “alternate” forecast methods, one that I first laid out over a decade ago: the consumer nowcast.

The way this works is to look at the economy from the viewpoint of the average American consumer. In order for the consumer economy to grow, at least one of the three below items must be happening:

1. Real income is growing.
2. A widely held asset class, in particular stocks or real estate, is appreciating (and thus available to be tapped into to free up cash.
3. Interest rates decline to new lows, allowing existing debt to be refinanced.

If none of these are happening, then a pullback in willingness to spend signals the onset of a recession.

Let’s take these in reverse order.

Last week the Fed released its household debt data, showing that household debt as a share of income peaked over two years ago. In Q3 2018 households became slightly more cautious compared with the quarter before:

Needless to say, stock prices last made a peak over 3 months ago. That source of cash has dried up.

House prices, however, have continued to climb, according to the most recent Case-Shiller index, meaning that home equity withdrawal remains a potential source of spending money:

And perhaps most fundamentally, as I wrote about last week, real average and aggregate non-supervisory wages have continued to grow.

So the consumer nowcast is not signaling recession.

Meanwhile, as I wrote last week at Seeking Alpha, the short term forecast through mid-year is for no a slowdown but no recession, unless caused by poor public policy — like, say, a trade war, or maybe a government shutdown that causes businesses to postpone plans due to lack of transparency.

That sort of policy debacle isn’t going to first show up in the long leading indicators and take an entire year or more to filter through the economy. It will show up, more or less, all at once.

But I would still expect some warning from the short leading indicators, most notably from measures of manufacturing, temp hiring and layoffs.

As of now, neither temp hiring nor layoffs have backed off enough for any sort of warning. On the other hand, although it is just one data point of many, that the Empire State Manufacturing Index’s new orders measure fell to an 18 month low (although still positive at +4) at very least continues the trend of a big slowdown in the industrial sector.

Keep an eye on these three areas (new orders, temp hiring, and new jobless claims). If these turn outright negative, that will be a very strong sign that poor public policy is causing what otherwise would just be a slowdown to tip all the way into recession.

Monday, January 14, 2019

Flying blind

 - by New Deal democrat

The government shutdown is affecting some important economic indicators. All of the series published by the Census Bureau, including retail sales, manufacturers’ and wholesalers’ data, personal income and spending, new home sales and housing permits and starts, are not being published.  It appears that GDP is not going to be published by the BEA either.

In the past I have created work-arounds for a few economic series, in particular new jobless claims and industrial production, neither of which appear affected at this point, as the former is published by the Department of Labor, and the latter by the Fed.

If the government shutdown continues — and a long shutdown, until there is widespread pain or an avoidable disaster (like a plane crash or widespread food-borne disease outbreak) looks like the most likely scenario for now — I will attempt serviceable work-arounds for at least some of these series.

For starters, retail sales was scheduled to be released this Wednesday. Almost certainly that isn’t going to happen, so on Wednesday I’ll publish a guesstimate that hopefully will at least get the direction correct, and capture some of the strength or weakness of that direction.

But, make no mistake, not having access to reliable economic data isn’t just a drawback for me, it’s a cost to any enterprises attempting to make decisions. Some of those businesses are going to postpone making a decision — on hiring as well as spending — until they have more clarity. And the postponement of spending decisions means a drag on GDP and employment.

Unfortunately it appears that the spate of short shutdowns in the past several decades have caused Washington to “learn” that, at least in the short term, nothing too bad happens when government is closed. Thus, flying blind will continue until we crash into something.

Saturday, January 12, 2019

Weekly Indicators for January 6 - 10 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Recent gyrations have changed both the short and long term forecast. Once again, it shows that the biggest problem is that most forecasters simply project existing trends forward.

As usual, reading the article should be informative for you, and helps reward me with a little pocket change for my efforts.

Friday, January 11, 2019

Real hourly and aggregate wage growth in 2018: very good, thanks to declining gas prices

 - by New Deal democrat

Now that December inflation has been reported as down -0.1%, with YoY consumer inflation a paltry +1.9%, let's update what that means for real wage growth in 2018.

Nominally, wages for nonsupervisory workers grew +0.4% in December. With inflation flat, that means real wages grew +0.5%: 

The good news is that real hourly wages are at their highest level in 45 years, having finally surpassed their levels from the late 1970s. The bad news is that they are nevertheless below their peak level in 1972-73!

On a YoY basis, real wages rose 1.4% for all of 2018:

Since 1999, the change in real wages has almost explusively been determined by the price of gas. Gas prices have fallen over -20% in the last three months, and that has made all the difference in real as opposed to nominal wages.

Finally, real aggregate wages (i.e., the total amount of wages, in real terms, paid to non-managerial workers) have now risen 27.9% from their bottom in October 2009:

The total advance during this expansion, while good, is nevertheless still exceeded by that of  the 1960s (+31.2% since the series began in 1964) and 1990s (+33.8%).

On the other hand, growth in real aggregate wages had averaged 2.5% in this expansion, varying from 1% to 8% depending on what has happened with gas prices:

In 2018, real aggregate wages grew +3.1%, the best level of the past 10 years.

In sum, the growth in both real and nominal wages was probably the best part of the economy in 2018 for average Americans.

Thursday, January 10, 2019

Gaming out the government shutdown

 - by New Deal democrat

There isn't any significant economic news today, and there have been some developments of note in the standoff about Trump's border "wall," so let me update my thoughts on this.

A week ago Sunday, I wrote that Pelosi should opt for a "maximalist" strategy of making affirmative demands for Democratic objectives, as well as taking GOP "hostages" like agricultural subsidies, as bargaining chips to use to come to a deal with Trump and the GOP, rather than an "accommodationist" strategy of simply opening the government as previously agreed to by the GOP (a deal that Trump had reneged on).

Well, Pelosi chose the "accommodationist" strategy, so where are we?

There are 4 possible outcomes:

1. Trump capitulates. This is only going to happen if large portions of Trump's own base abandon him, as they did with the child separations at the border.

2. Pelosi and the Dems capitulate. If negotiations are off the table, and Trump's base doesn't turn against him, this is the more likely outcome.

3. Trump, the GOP, and the Dems negotiate a deal.  This happens if all sides can claim "victory." Trump gets appropriations for something he can call a "wall," and Democrats get something - like the DREAM Act - they can call victory as well. Since Trump has a demonstrated history of reneging on deals after pocketing concessions, any proposed deal is going to have to get around this procedural issue.

4. The Dems and the GOP negotiate a veto-proof deal. If Trump's base does not turn on him, but Congressional GOPers fear for their re-election chances in 2020, there is at least a slim possibility that they could cut a deal that overrides a Trump veto.

Now let's review where we are.

As I anticipated, since Pelosi was unable to obtain a 2/3's majority in the House, Trump is standing pat, and so is McConnell, since he has nothing to gain by trying to override a veto unless the House will do so as well.

So at the moment we are stuck in a "win-lose" capitulation scenario, with both sides becoming more and more entrenched as each is aware that its base will be furious with capitulation. In movie terms, this is a game of chicken where both drivers are speeding towards a cliff.

Right now, actually going over the cliff looks like the most likely scenario. "Going over the cliff" means that more and more government services shut down, and more and more pain is inflicted on an ever-increasing number of people. The shutdown will continue until there is so much widespread pain inflicted on average Americans that they scream for both sides to make it end, without really caring who caves in.

The first and most likely place for pain to be felt is airline travel, which is already starting. As more TSA security either fail to show up or outright quit, air travel will become very unpleasant. Slowdowns by overstressed air traffic controllers and by pilots aren't unlikely either. But that is probably not enough.

The more likely sources of the widespread pain are either (more likely) tax refund checks and/or Social Security checks stop going out; or (less likely) a widespread outbreak of food-borne illness  due to lack of FDA inspections.

But let's be clear on something unpopular: if we do go over the cliff, it is because *all* of the parties, including the Democrats, are willing to see widespread pain inflicted on ordinary Americans, rather than be seen to be capitulating.  As an aside, let's also be clear that there is a large faction of the GOP -- what Digby and Atrios call "E Coli conservatives" - who are perfectly happy with this, since they favor a return to 1859 anyway, minus the messy slavery bit.

In this case, the plurality if not majority of people are not going to care about apportioning blame. They are going to want "both sides" to give something up to get the government open. That probably means that the Democrats get nothing affirmative, but the funding for Trump's "wall" is cut back.  This comes closest to scenario #2, although it does involves some capitulation by Trump as well.

I've seen some commentary that suggests Trump will declare an "emergency" and claim victory even if the move is immeidately torpedoed by Congress and/or tied up in the Curts. The issue I have with this theory is, I see no reason why Trump would sign any funding bills while the challenges are pending, unless portions of his base abandon him. So I don't see how we avoid the "going over the cliff" part.

Since the one condition under which Trump will blink is if enough of his own base abandons him on this issue, #4 is the least likely scenario, because in those circumstances, Trump himself will capitulate.

Scenario #3 - the scenario for which I advocated - is less likely than the "going over the cliff" scenario, but more likely than #4.  At the moment, the only people pursuing this are a handful of GOP Senators. Here's a tweet on this from yesterday. I've included the retweet by Markos Moulitsas so that you can be assured that I am not the only one guilty of purity apostasy:

The biggest problem with scenario #3 is that, in between the agreement and Trump's signature, Lou Dobbs, Sean Hannity, and Stephen Miller are sure to try to reach him and rail against compromise. To get around that, in the past I've suggested making use of -- with as much hoopla as possible --  the "President's Room" in the Capital Building, and ensuring that the House and Senate both approve the deal before the President leaves the room, all the while he has to be chaperoned by the likes of Sens. Schumer and Graham to distract him (Pro tip: Kim Jung Un showed the way to do this). The only other possibility is to insist that, e.g., the DREAM Act be passed and signed first, with its taking effect contingent on the second bill appropriating $$$ for a wall, also being passed.

But, unfortunately, to recapitulate my point, so long as we are in a win-lose game of capitulation chicken, a large chunk of Americans are going to have to suffer some real pain before this impasse gets resolved, and so long as the point is that of wall vs. no wall, Democrats are not going to gain anything affirmative out of it.