Monday, March 21, 2016

Five graphs for 2016: March update

 - by New Deal democrat

At the beginning of this year, I identified graphs of 5 aspects of the economy that most bore watching.  With the first 2 months of data under our belts, let's take a look at each of them.

#5 The Yield Curve

The Fed having embarked on a tightening regimen as of December, the question is, will the yield curve compress or, worse, invert, an inversion being a nearly infallible sign of a recession to come in about 12 months.

Here's what has happened so far:

Rates on 2 year treasuries have risen slightly, while the 10 year treasury yield has fallen (typically long rates only start to fall once the tightening cycle has caused the economy to weaken).

Still the difference in the two rates, at about 1%, is typical when measured over the long term.  There is no particular tightness here.  At the same time, if the trend continues (no guarantee of that), then even as few as two more .25% rate hikes by the Fed could cause the yield curve to invert.

#4 The trade weighted US$

Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US$ that began in late 2014 -- which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.

Here there has been a big change:

Against all currencies, the US$ is now only up 3% -- a typical reading.  Against major currencies, the US$ has actually declined YoY.   This is good news.

#3 The inventory to sales ratio

An elevated ratio of business inventories to sales means that businesses are overstocked.  This has frequently but not always been associated with a recession.  Here the news is not good at all:

Typically sales peak/trough first, and inventories catch up with a lag.  In late 2015, inventories went sideways, even as sales continued to slide.  In the last two months, not only have sales continued to decline, but more inventory has been accumulated.  This is going in the wrong direction, and is about the single worst statistic in the economy. 

#2 Discouraged workers

While 2015 saw a big improvement in involuntary part time employment, the number of those so discouraged that they did not even look for work, even though they want a job, went stubbornly sideways until the last quarter of 2015.  In the last two months it has actually retreated from its December low,  and is still elevated well above its rate in the later part of the 1990s through 2007:

This may be just noise, or it may herald a stagnation in improvement.

#1 Underemployment and wages

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, nominal increases have averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power. 
There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers. 

This expanded "U6" unemployment rate ( minus 10%)  is shown in blue in the graph below, toether with YoY nominal wage growth (minus 2%):

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  U6 is now 9.7%, and there has been some mild improvement off the bottom.  More than anything, the US needs real wage growth for labor, and the present nominal reading of slightly over 2% still isn't nearly good enough.