The Bonddad Blog: 3/27/16

Saturday, April 2, 2016

Weekly Indicators for March 28 - April 1 at XE.com

- by New Deal democrat

My Weekly Indicator piece is up at XE.com.

There is a constellation of things that tend to happen near the end of a recession or inventory correction, and ....

Friday, April 1, 2016

ISM new orders surge to 58.3: the shallow industrial recession is ending

- by New Deal democrat

OK, probably ending, since nothing is perfect. But if there are reasons to be more concerned about 2017, this morning's ISM report is very strong evidence that the shallow industrial recession we have had for the last year is ending, either now or within the next 3 months.

Last month I wrote that "For me to be confident that this slowdown was ending, I would want to see new orders spike to at least 54."

Well, as forecast by the regional Fed reports, New Orders blew out to the upside at 58.3. With the sole exception of the month of September 2001 (for obvious reasons), there has never been a reading over 55 in a downturn in industrial production that hasn't either coincided, or been shortly followed by, the end of that downturn. This is true all the way back to 1948, although the below graph (thru January), for clarity, just focuses on the last 20 years:

Here is a close-up fo the last 10 years, updated through this morning, comparing ISM new ordes (red) with industrial production(blue):

Let me put this about as strongly as I can: this has been the single most important datapoint so far this year.

From Bonddad: Let me add a few points:

First, the anecdotal comments are unanimously bullish:

"Unemployment rate is low in our county, making it hard to find workers. We are understaffed and running lots of overtime." (Plastics & Rubber Products)
"Business in telecom is booming. Fiber plant is at capacity." (Chemical Products)
"Current trends remain steady. No issues with delivery or costs." (Computer & Electronic Products)
"Capital equipment sales are steady." (Fabricated Metal Products)
"Requests for proposals for new equipment [are] very strong." (Machinery)
"Government is spending again. Have received delivery orders." (Transportation Equipment)
"Things are starting to pick up. Our business is seasonal and it is that time of year." (Printing & Related Support Activities)
"Business conditions are stable, little change from last month." (Miscellaneous Manufacturing)
"Incoming sales are improving." (Furniture & Related Products)
"Our business is still going strong." (Primary Metals)

Not one shows weakness.

Why this is happening? The oil market is contracting, lowering their capital investment needs. International markets are weak and the dollar is still strong. It's possible we could see equipment replacement drive demand:

Global sales of construction equipment such as bulldozers, diggers and dump trucks are expected to expand in 2017 after five years of shrinkage, according to Off-Highway Research, a consulting firm.

Machinery manufacturers including Caterpillar of the US and the UK’s JCB have been hit since 2012 by falling demand, which is rooted in China’s economic slowdown and the negative impact this has had on industries including construction and mining.

Off-Highway Research is expecting a rebound in global unit sales of construction machines in 2017, driven by the gradual replacement of ageing vehicles and its prediction of an improvement in commodity prices.

To that end, consider this chart of the XLIs, which have recently rallied:

And a majority of the ETFs 10 largest holding are either stronger than the SPYs or improving:

March jobs report: mixed headline, mainly negative leading employment indicators

- by New Deal democrat

HEADLINES:

+215,000 jobs added
U3 unemployment rate up +0.1% to 5.0%
U6 underemployment rate up +0.1% 9.8%

With the expansion firmly established, the focus has shifted to wages and the chronic heightened unemployment. Here's the headlines on those:

Wages and participation rates

Not in Labor Force, but Want a Job Now: down 158,000 from 5.870 million to 5.712 million
Part time for economic reasons: up 135,000 from 5.988 million to 6.123 million
Employment/population ratio ages 25-54: up +0.2% from 77.8% to 78.0%
Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 from $21.33 to $21.37, up +2.3%YoY. (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

January was revised downward by -4,000. February was revised upward by +1,000, for a net change of -1,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mainly negative

the average manufacturing workweek fell from 41.8 hours to 41.7 hours. This is one of the 10 components of the LEI, the net will be a negative.

construction jobs increased.by +37,000. YoY construction jobs are up +301,000.

manufacturing jobs decreased by -29,000, and are now *down* -20,000 YoY

temporary jobs - a leading indicator for jobs overall increased by 4,000 (but is still down from December's high).

the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 115,000 from 2,297,000 to 2.412,000. The post-recession low was set 7 months ago at 2,095,000.

Other important coincident indicators help us paint a more complete picture of the present:

Overtime was unchanged at 3.3.
Professional and business employment (generally higher-paying jobs) increased by +33,000 and are up +606,000 YoY.

the index of aggregate hours worked in the economy rose by 0.2 from 104.9 to 105.1 (but is still below January's 105.3).

the index of aggregate payrolls rose by 0.5 from 127.2 to 127.7.

Other news included:

the alternate jobs number contained in the more volatile household survey increased by +246,000 jobs. This represents an increase of 2,987,000 jobs YoY vs. 2,802,000 in the establishment survey.

Government jobs rose by +20,000.

the overall employment to population ratio for all a ges 16 and above rose by 0.2 from 59.8 to 59.9 m/m and +0.6% YoY.
The labor force participation rate rose 0.1% from 62.9% to 63.0% and is now up +.0.3% YoY (remember, this incl udes droves of retiring Boomers).

SUMMARY

Let me start with the positive. In addition to the headline jobs number, the best news was the jump in the employment population ratio and the labor force participation rate. The core e/p ratio for ages 25-54 has jumped +0.5% just in the last 3 months, and has now made up almost 2/3 of the ground it lost in the last recession. That jump in participation is why both the unemployment and underemployment rates rose slightly.

Another piece of good news is in the leading construction sector, which has added nearly 5% more jobs in the last year. The higher paying professional and business services sector also has added about 3% more jobs in the same time. Hourly earnings continued to be "meh," although aggregate payrolls grew smartly.

But the negatives, especially among the series that lead, are beginning to outweigh the positives. Revisions were mixed. The manufacturing workweek declined, and manufacturing jobs are now down YoY. Although temporary jobs rose this month, they have failed to top their December peak for the last 3 months. Short term unemployment has continued to rise slightly. A coincident indicator, aggregate hours, also failed to exceed its January high.

So while we can cheer yet another month of jobs added to the economy, and the jump in participation, this report just adds to my concern about next year.

From Bonddad:

A few comments on top of NDD’s points:

We’re seeing the long-term impact of the oil market slowdown along with the weaker trade environment. From the report:

In March, employment in professional and business services changed little for the third month in a row. In 2015, the industry added an average of 52,000 jobs per month.

Employment in manufacturing declined by 29,000 in March. Most of the job losses occurred in durable goods industries (-24,000), including machinery (-7,000), primary metals (-3,000), and semiconductors and electronic components (-3,000).

Industrial production has been weak for the last 12 months while capital investment contracted in the 4Q15. The combination of these two events means manufacturing jobs will be declining, explaining the drop of 29,000. And, we’re also seeing broader ramifications of this slowdown. For example, as manufacturers slow, they consumer fewer professional services, i.e. they are more judicious in using their accountant or lawyer. This explains the weak pace of professional job growth.

Both the participation rate and employment/population ratio increased .1%. This tells us that people are coming back into the labor force – another health sign.

However, how long can this pace of hiring continue in the face of weak corporate profit growth?

At some point, you’d think businesses would start to cut costs

Bonddad Friday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST. You can sign up at this link.

Big Increase in temporary and contract workers over the last 10 years (NYT)

But see, range anxiety holding back electric cars (FT)

Weak export orders hit UK (FT)

Defensive sectors lead U.S. in 1Q (FT)

Thursday, March 31, 2016

Emerging Markets Outperforming SPYs

Bonddad Thursday Linkfest

Thursday I'll be doing a free webinar that will review the last month or so of US economic data along with an overview of the major markets (equities and bonds). It's free! It'll last at most 30 minutes (probably shorter). You can sign up here.

Canadian Producer Prices

Lower income households are getting clobbered by rent increases

- by New Deal democrat

Tomorrow just about every data point in the world will be reported ... but while we are waiting, here is an important story that will particularly be of interest to our progressive readers.

A study by the Pew Foundation shows that rents are killing lower income households. Oddly, it hasn't been picked up by progressive blogs. I came across the study by way of Mike Shedlock, who claimed that it shows that consumers haven't been spending any of their gas savings. Ummm, actually, no, since the first thing that Pew tells us is that

Expenditures are a key but often overlooked element of family balance sheets. .... [T]his chartbook uses the Bureau of Labor Statistics’ Consumer Expenditure Survey to explore household expenditures, examining changes in overall spending and across individual categories from 1996 to 2014.

Since gas prices only started their big decline late in 2014, actually the Pew study tells us absolutely zero about what consumers have done with their gas savings in 2015 and 2016. But I digress.

Here is the overall summary graph from the Pew Foundation:

More important is the breakdown in expenses of shelter, transportation, food, and healthcare costs that Pew finds contributed the most to the increase in household expenditures.

Notice two things in particular about this graph. First of all, from 2004 through 2013 there are slow increases in housing, transportation, food, and healthcare. Secondly, there was a spike in at least 3 of the 4 series in 2014, accounting for the lion's share of the entire two decade change! I would love to know what that is all about (was there a quirk in the sample, or the data?). Pew unfortunately doesn't explain. But by far the biggest spike, accounting for 5% of all household expenditures, was in housing.

A final graph shows that for lower income households, rents spiked in 2014 from just over 30% to just under 50% of their entire expenditures!

This is confirmed by the measure of median asking rent, compiled by the Census Bureau:

Note that rents have soared in the last few years, and made yet another all time record, even adjusted for inflation, in the last quarter of last year. This even as wages for lower income jobs have actually declined in real terms since the recession.

Further, it is entirely rents that are driving the increase in inflation in the last few months. Take out housing costs, and the CPI is almost exactly ZERO now, and has been negative for the last year:

This is particularly important, since the Fed has been claiming that an uptick in inflation justifies raising interest rates. But raising interest rates will only make housing even more unaffordable, a completely perverse outcome.

I do expect a big secular increase in the construction of new condominiums and apartments, because the return in profits, due to high rents, is so compelling. But in the meantime, lower income households are getting absolutely clobbered by increased housing costs, and although the Pew study stops in 2014, it seems likely that at least some of the subdued increase in consumer spending we have seen since is because increased rents are soaking up some of consumers' gas savings.

Wednesday, March 30, 2016

Why I am optimistic about the near term

- by New Deal democrat

Earlier this week I raised a yellow flag for next year, as too many of the long leading indicators are down from their peaks, several seriously so.

But I still don't see the present situation as giving rise to an imminent recession. Here's why:

1. The US$ is no longer a drag on the economy:

Since the huge increase in the value of the US$ was the biggest reason for the deceleration in the economy last year, that it has abated is good news for the rest of this year.

2. Oil may not have bottomed, but it looks like it is getting close. The below graph shows the price of gas in absolute terms (blue, right scale) and the YoY% change (red, left scale):

Because gas prices do change seasonally, I am using my rule of thumb that a reading that is "less bad" by 50% from the non-seasonally adjusted YoY% change, is close to a seasonally-adjusted bottom. Gas isn't quite there yet, but the trend for the last year has been progressively "less bad" YoY% changes.

That means that, while the Oil Patch will remain objectively awful, it probably won't get much *more* awful -- although I am still waiting for the "dead whale to wash up on the beach," i.e., the bankruptcy of a well-known, major player -- that I suspect will signal the absolute bottom.

3. Five for five regional Fed indexes showed a surge in new orders. Here's the completed list for March, including Dallas, which just reported:

Empire State up +22 to +10
Philly up +21 to +16
Richmond up +30 to +24
Kansas City up +5 to -2
Dallas up +13 to -5
Month over month rolling average: up +18 to +9

This month may be the one time when Friday's ISM manufacturing release may be more important than the employment report.

4. If this is like 1998, ISM new orders will take off to the upside, followed with a short lag by sales, ending the inventory correction.

Here is 1998:

Here is the last 2 years:

In 1998, a rise in the inventory to sales ratio was resolved not by a recession, but rather by a surge in new orders taking care of the backlog. We'll see if that happens again this time.

5. Mortgage applications are up from horribly low to just low (from Mortgage News Daily):

The low interest rates sparked by the "flight to safety" in US Treasuries several months ago are having their natural affect.

Put all of this together and you have a recipe for industrial production to start to increase, and a likely increase in housing.

That's why I remain positive on the near term, and an important reason why I am reluctant to go completely negative on next year just yet.

Bonddad Wednesday Linkfest

Japanese Industrial Production: Not Good

Tuesday, March 29, 2016

Friends Shouldn't Let Jazz Shaw Write About Economics

I've previously written about Jazz Shaw (see here, here and here). So sum up:

He is a crusader against the minimum wage. But, he does not have the required background to write about economics. There is no mention in his publicly available biography indicating a position in the financial services industry or any college level economics training. As a result, he is completely unfamiliar with micro-economic concepts such as the short-term cost curve and elasticity. He also used the wrong data to argue Seattle's minimum wage experiment is working. Again, see the above links for this information.

Now that Califonia has argued it will raise it's minimum wage to $15/hour, Shaw has chimed in with a similarly misinformed piece. He begins with this statement:

Despite what’s already happened in Seattle and other, more confined locations, the word on the street out on the left coast is that California has cut a deal to raise the statewide minimum wage to $15 per hour incrementally over a few years time.

No. That is not what has happened. The article on which he relies was published by the AEI. It used the wrong data and was meaningless (see links above). I tweeted this information to Mr. Shaw who ignored it. Had Mr. Shaw the requisite knowledge in economics, he would be familiar with basic statistical concepts such as sample size and composition. But, he is not.

His latest article has three huge problems, starting with this paragraph:

One can only imagine how thrilled the waiters and waitresses will be when they’re asked to bus tables in addition to their regular duties after the bus boys are cut loose. And the customers will simply need to adjust to having fewer menu options. If you’re going to cut back on the kitchen staff, you’ll need to slim down the production line so they can focus on a smaller number of dishes they can make in larger numbers. But I suppose if all the eateries have to do it the customers will have no other choice. At least they’ll get to pay more for the meals that are still available!

Mr. Shaw argues that, because businesses may have to cut staff, that waiters will be "less than thrilled." But, he doesn't recognize that restaurants are a labor intensive business. When this is balanced against the already known principle that business owners maximize profits, we can assume
the current level of labor is already as low as it can go while at the same time maximizing profits. Put in less economic terms, there probably isn't much fat to cut in this area.

In addition, he assumes cutting the number of menu items will lead to a massive drop in alternatives. In fact, most restaurants already know the dishes they would like to cut but haven't for reasons of sentimentality or they are preferred by a few regular customers. But eventually dropping these items may lead to increased profits for the owners -- a fact which, I assume, Mr. Shaw would approve. Finally, Taco Bell has yet to have a problem finding new items to serve despite only having maybe 10 items to work with.

And finally, the US is currently in a low inflation environment, meaning businesses have little if any pricing power. Businesses will be thrilled to have the room to raise prices, using the minimum wage boost as the justification.

Finally, Mr. Shaw's knowledge of the topic is clearly behind the times. As the noted in today's Financial Times:

Many economists have also changed their views. Economics textbooks used to state that if you raise pay above the value it creates for employers, you reduce demand for labour. In other words, minimum wages cost jobs.

But economists’ opinions are now more nuanced, in large part because of the experience of countries such as the UK, which have so far sustained steady increases in the minimum wage without doing any notable damage to employment.

The early signs from Germany are also positive. In spite of nervousness from businesses about the introduction of a minimum wage of €8.50 an hour last year, the unemployment rate has continued to fall and is now at a record low.

“My view of the history of minimum wages is that we’ve always been surprised about how you seem to be able to push them up without harming job prospects,” says Alan Manning, a professor at the London School of Economics.

That about sums it up, doesn't it?

Bonddad Tuesday Linkfest

Personal income up .2%/ PCE up .1% (BEA)

This undershot Macroadvisers estimates in a big way (Equitablog)

Today's Japanese Statistics in Perspective

Monday, March 28, 2016

Long leading indicator update for 2017

- by New Deal democrat

As George Harrison once sang, "All Things Must Pass." My updated look at the long leading indicators is up at XE.com

Bonddad Monday Linkfest

Is Beef What's For Dinner, Again?

Sunday, March 27, 2016

US Bond, US Equity and International Week in Review

These are over at XE.com

US Bond Market Week in Review

US Equity Market Week in Review

International Week in Review

On Thursday at 3PM, we’re hosting a webinar on the last month’s economic and market data. It’s free and will last 20-30 minutes. You can sign up here.