Saturday, March 19, 2016

Weekly Indicators for March 14 - 18 at XE.com


 - by New Deal democrat

My Weekly Indicator post is up to XE.com.

Most of the negative trends of 2015 have abated.  And then there's rail traffic ....
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Friday, March 18, 2016

Jazz Shaw Doubles Down on Stupid

     One of the great things about suffering from the Dunning-Kruger effect -- which Jazz Shaw clearly does -- is that you don't know when you look stupid.  It allows you the option of continuing to make the same incorrect arguments without having the burden of acknowledging that you're beyond wrong.  And that's exactly where we are with one Mr. Shaw in his continual quest to argue that moderate increases in the minimum wage lower employment.

     First, let's review where we are.

1.) I have demonstrated that, based on the public record, Mr. Shaw is not qualified to discuss economics.
2.) Mr. Shaw -- like many on the right -- assume labor demand is elastic, when in fact it is inelastic.
3.) Mr. Shaw -- like many on the right -- has no idea about the cost curve, which is a central concept in microeconomics, nor can he explain why lower usage of labor would not lead to lower revenues (again, basic micro).  This point bolsters point 1.
4.) Mr. Shaw used the wrong data to prove his argument that the minimum wage caused a drop in Seattle employment.  This also boosts point 1.
5.) Notice now many things Mr. Shaw has said prove he doesn't know when he's talking about?  This is a classic case of Dunning-Kruger.

Now, Mr. Shaw is back, arguing that, because the CEO of Carl's Jr. is thinking about using Kiosks in response to minimum wage increases, that those increases will lead to lower employment.  And on the surface, that makes sense, right?  After all, there will be fewer jobs now.

But here's the rub: will it work?  We once again run into basic micro-economic concepts, which Mr. Shaw obviously doesn't know.  As I pointed out a few articles ago, the short-term cost curve demonstrates that, when you cut back too much on labor costs, your revenue goes down.  Again, micro 101 in action.  What happens is simple: the drop in labor means less customer service, less efficiency and less product produced.

More importantly, Wal-Mart tried this idea, with remarkably negative consequences:

 A recent Reuters’ analysis confirmed something that many consumers have long suspected: Walmart simply does not have enough employees. The discount king’s footprint grew by around 45% in the last decade, yet its employee base grew by around eight percent.

 That explains why customers sometimes have to spend up to half an hour searching for an employee when they need help at Walmart. It also appears to be the root cause of some of Walmart’s most glaring deficiencies, such as empty shelves, out of stock merchandise, long checkout lines, overaged produce on the shelves, and declining same store sales.

 Reuters’ numbers indicate that the average Walmart employee has to deal with about 34% more store space. From a practical standpoint, that means a lot of work is not getting done at Walmart.

 It also benefits competitors like Kroger (NYSE: KR) and Costco Wholesale (NASDAQ: COST), which are well known for high levels of customer service. One problem that Walmart is facing these days is that competitors like Costco and Kroger have figured out how to provide the kind of deep discounting customers want while delivering a fairly high level of customer service.

 A big reason for these chains’ success has been their willingness to pay employees more and to offer benefits. Another has been their willingness to maintain a higher level of staffing, which increases expenses but retains customer loyalty.

 This creates a dilemma for Walmart, which notoriously pays its employees very little. One result of this was that Walmart was effectively running a retail training school rather than a store. Employees would go to work there, get some experience and understandably move on to someplace like Kroger that offered higher wages and good benefits.

 You might also want to see this article comparing Costco and Wal-Mart.

 Finally, the research shows that modest increases in the minimum wage actually stimulate the economy.   There are number of reasons why, but Keynes Marginal Propensity to Consume offers the best answer (someone else who Mr. Shaw doesn't know anything about).

So, once again Mr. Shaw is wrong.  But it doesn't matter to him because he's frankly too stupid to know that he's wrong -- which is part and parcel for Hot Air's economic analysis.
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JOLTS adds to accumulating evidence of late cycle weakness


 - by New Deal demorat

Yesterday's JOLTs report (note: for January) has given us a more detailed look at the jobs market.  Last month was a particularly good report, but for most of the last 12 months I have been underwhelmed, noting that the pattern was similar to that in late in the last expansion.

First, here is a comparison of job openings (blue) and hires (red).  We only have one compete past business cycle to compare this with, so lots of caution is required, but in that cycle, hires peaked first and then openings continued to rise before turning down in the months just prior to the onset of the Great Recession:



That late 2005-06 pattern is what we hae been seeing for nearly a year now, as shown in this close-up of the last 2 years:




 The same thing shows up in the YoY comparisons:


Early 2016 looks very much like early 2006.

After making a new post-reession record last month (very good), quits fell back at their late 2015 level:



Still, overall trend in quits appears to be positive, most like late 2005.

The good news is, this still looks like a late cycle slowdown, but not an actual contraction.  The bad news is, last month's good report was probably something of an outlier, and the evidence keeps accumulating that we are getting late in the expansion.
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Bonddad's Friday Linkfest

At 3PM CST on Thursday, March 31, we’ll be reviewing the latest month of economic and market data in the US.  This is a free webinar that will last about 30 minutes.  You can sign up here.


Russia is in Terrible Shape





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Thursday, March 17, 2016

First autos wobbled, now it's housing

 - by New Deal democrat

The two most leading sectors of the consumer economy are houses and cars.  For the last three months, vehicle sales have backed off of last autumn's highs.

My take on yesterday's report on housing permits and starts is up at XE.com.

At best, we have hit a temporary plateau.
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Bonddad Thursday Linkfest

At 3PM CST on Thursday, March 31, we’ll be reviewing the latest month of economic and market data in the US.  This is a free webinar that will last about 30 minutes.  You can sign up here.





Chart from the Fed 


5-year Chart of the Dollar


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Wednesday, March 16, 2016

I am running out of positives


 - by New Deal democrat

Not everything is gloom and doom.  Let me get the positive out of the way first: manufacturing industrial production rose +0.2% in February.  There is no sign whatsoever that the severe downturn in commodity production and exports, which caused the overall industrial production number to decline -0.3%, has hit the large manufacturing sector.  I don't see a recession where both employment and manufacturing are growing:



Now the bad news.  Although the -0.2% decline in consumer prices in February means that real retail sales were flat, the big downward revision in January was in no way ameliorated:



Worse, real retail sales per capita have been basically flat for 8 months, with a peak in December:



(note that population data isn't available for February yet, so the graph ends with January.)  This is a long leading indicator.

Just as bad, housing, which is perhaps the best of all long leading indicators, has also turned flat to negative.  No graphs yet, but neither permits nor starts made a new high.

Since the middle of last year, because of the NYC distortions, I have been looking at single family permits, and also permits excluding the Northeast in order to compensate.  Neither one of these made a new high, either, and both look flat for at least the last 4 months.

With a very long lag, 4th Quarter corporate profits will finally be reported as part of next week's final revision to Q4 GDP.  Should these not make a new high, which seems most likely, that would leave real money supply and the yield curve as the only two long leading indicators still giving positive results.

I am running out of positives.  At the moment there is no engine for growth.  Unless there is a quick jump-start to production and profits from the abating of US$ strength, or consumers finally spend much more of their gas savings, this does not bode well for 2017, and possibly Q4 of this year. 
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Bonddad Wednesday Linkfest



UK Unemployment rate:









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Tuesday, March 15, 2016

The US$ has ceased being a drag on the economy


 - by New Deal democrat

The biggest drag on the US economy for over a year and a half has been the surging US$, which favored imports and hobbled exports, counteracting the benefit to consumers of lower gas prices.

As I have been documenting in the last several months, all of the trends from the 2015 economy are changing.  And the biggest, most important of those trends, the strength of the US$, has also changed.

Here is the YoY% change in the trade weighted US$,, both broad (blue) and against major currencies (red), as of the Fed's update yesterday:



Not only is the US$ now down YoY against major currencies, but it has also faded to being just 3% positive YoY on the broad scale.  This is a much more neutral reading, as shown in this longer term view:



Note in particular that the YoY% change in the US$ has fallen to about where it was exiting the last two recessions.

It will take a few months at least before this feeds through into imports and exports, as well as corporate profits.  But for now the US$ has ceased being a drag on the economy.

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Retail sales: February OK, January revisions - OUCH!


 - by New Deal democrat

The slight negative report for February in retail sales is not concerning, or at least not until we find out what February inflation was in the CPI report tomorrow, especially since ex-gasoline they were up +0.2%.

But the big OUCH! was the revision in January from +0.4% to -0.2%.  Here's the dismal graph:


The big hit was in general merchandies.  In particular furniture sales, building materials, and sporting goods, and  were poor.  I don't have a good explanation, and I find this revision particularly bothersome since it contradicts the contemporaneous weekly reports.  Needless to say, any evidence that the consumer is rolling over is particularly unwelcome.

In any event, further consideration after tomorrow.

P.S.:  I see that Bill McBride is reporting a good YoY number.  He has been using the same metric for auto sales, which one a monthly basis have retreated from their late 2015 highs .  As I have repeatedly pointed out, where we have seasonal adjustments, looking at YoY numbers will miss turning points, sometimes badly.  This makes tomorrow's housing permit and starts numbers all the more important.
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Monday, March 14, 2016

Jazz Shaw: Dear God But the Economic Stupid is Strong With This One

     Jazz Shaw is a blogger at Hot Air who has written several pieces on Seattle's minimum wage issue.  He argues that the hike -- which is just beginning to take effect -- has sent Seattle employment plummeting, thereby proving his point that the hike was ill-advised.  However, as I will point out, Mr. Shaw is not only ill-qualified to make such an argument, but that the data he is using to justify his conclusion is the wrong data.  This second point not only disproves his thesis, but also bolsters my contention that Mr. Shaw is simply unqualified to write about economics in general.

     Who is Jazz Shaw?  Oddly enough, for a man with an extensive online presence, we know remarkably little.  I received the following after typing "Jazz Shaw, Biography" into Google:

 Jazz Shaw is a heretical, Northeastern former RINO and the weekend editor at HotAir.com He can be reached at jazzshaw@gmail.com. Or you can follow him on Twitter @JazzShaw

This tells us nothing about his qualifications to write about economics.  My suspicion is that he has no training in the field.  I will happily change that opinion should I see contradictory information. However, if he wanted to bolster his assertions, we'd probably see something definitive about his background.  In addition, his statement "Is economics really a science? I’ve long felt it should be taught alongside astrology or some related field," is not only wrong (there is a tremendous amount of data and analytical work in the field that is statistically and mathematically very sound) but is the kind of thing someone would say to imply they could offer an informed opinion without having the requisite pedigree to do so.

     Let's turn to his latest effort, which is titled, "Fight for 15 update: Seattle employment craters." The entire basis for this article is a report from AEI, which supposedly shows a large drop in Seatle employment numbers after the minimum wages increased.  Here's the problem:  The AEI study uses the wrong data to justify its argument.  From the LA Times:

 Now, Perry is back, armed with what he says are Seattle-only statistics. "Seattle's 'radical experiment' might be a model for the rest of the nation not to follow," he wrote on Feb. 18. He cited figures from the Bureau of Labor Statistics showing that Seattle employment fell by more than 11,000 from April, the date of the first minimum wage hike, through December. He compared these numbers to the Seattle MSA, writing that "while jobs in the city of Seattle were tanking starting last April, employment in the suburbs surrounding Seattle was increasing steadily to a new record high in November."

 Unfortunately, local economists say Perry is still using bad data. Although he attributes the city-only numbers to the Bureau of Labor Statistics, they're not reliable jobs numbers. Perry's source is the Local Area Unemployment Statistics file, or LAUS, which is based on a small sampling. It's aimed at counting the number of employed people living in the sample area (in this case, Seattle), not the number of jobs. The data are "prone to error," University of Washington economist Jacob Vigdor told me by email, and "basically worthless for any serious analysis." 

 Indeed, Vigdor — who is overseeing the university's analysis of minimum-wage data — notes that the same statistics for Bellevue and Everett, Wash., showed exactly the same percentage decrease that Perry found in Seattle, even though they haven't increased their minimum wage. (See below.)

Cities that didn't institute a wage hike experienced the same drop. That indicates something else is the cause of the drop.  You can't argue an event only impacting one area is the primary cause for the drop in two adjoining areas experiencing a similar decline.  That's poor logic.

     Shaw's and Perry's reasoning run into two primary microeconomic problems.  Both assume labor demand is elastic (a term I doubt Mr. Shaw is familiar with) -- that a change in cost will have a disproportionate impact on demand.  However, this simply isn't true.  For example, let's assume that a restaurant owner currently has 10 employees when wages increase.  Let's assume he fires 4 people due to increase cost.  At some point, he'll cut off his economic nose to spite his face -- that is, he'll lower his payroll to such an extent that he'll hurt customer service, lowering overall revenue.  Given the profit maximizing principal underlying cost theory (again, I doubt Mr. Shaw is aware of this concept, either), the current level of 10 employees is probably already peak efficiency, which means he'll either, absorb the cost, cuts costs elsewhere, raise prices, or do some combination of all three.

     And then there's the inherent problem of the production function graph:



As anyone who knows micro (which, it is painfully obvious Mr. Shaw doesn't) would note, when you lower your primary short-term variable cost (labor) you also lower your output.   Now, it's possible you might not do too much damage, depending on a number of different factors, but the bottom line is that you're moving in the wrong direction.

     So, Mr. Shaw, you have not won the argument, as you claim.  In fact, you've demonstrated that you really don't know anything about economics.  This of course, doesn't concern him.  He is a political blogger making political points.  Data is irrelevent.  However, it's also important that a record exists documenting his incompetence in this matter, if for no other reason, than to show him the large error(s) in his analysis.




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Two encouraging signs from Transport


 - by New Deal democrat

Charles Dow's theory was that industrial production and the transportation of goods should move in tandem.

While we don't have any high frequency data with respect to manufacturing generally, last week I shared a graph showing that steel production appears to have bottomed, and indeed for the last two weeks the YoY change in steel has been positive.

On the transport side, rail traffic is reported weekly, but truck traffic only monthly.  The AAR report of carloads ex-coal shipments has been particularly encouraging.  Here's a graph of the last 3 years:



What is particularly positive about rail carloads ex-coal is that in the last few weeks, they haven't just been outperforming 2015, but 2013 and 2014 as well. They've been outperforming 2015 since mid-January.  And this measure doesn't include intermodal traffic, which is heavy with imported goods.  In other words, transport of domestically manufactured goods by rail looks pretty encouraging.  In a couple of weeks, the comparisons will get more challenging.

One pretty good monthly measure of trucking, meanwhile, is the Cass Freight Index, which just came out for February.  Since trucks do not carry coal very much, the comparison with rail carloads ex coal is a good one:



This is still negative YoY, but note that it is much "less bad" than any comparison since September.  And sufficiently so that it suggests that if we could seasonally adjust, probably late last autumn was the bottom.  We'll have to wait a month and see if trucking follows rail into positive territory in March.
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Sunday, March 13, 2016

US Equity, US Bond Market and International Week in Review

International Week in Review

 US Equity Market Week in Review

US Bond Market Week in Review
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