My Last Posts of the Year Are Up at XE

International Week in Review

Bond Market Week in Review

Weekly Indicators for year end 2017 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.  The year 2017 is ending in a very positive fashion.

The Doomers have been almost completely silent.  This means I must begin to compile a list of things that I can start to worry about ....

Happy New Year!

2018 Looks Like a Solid Economic Year

This is over at xe.com

In which I mark my forecast for 2017 to market

 - by New Deal democrat

At the beginning of each year, I fearlessly forecast the economy over the ensuing 12 months.

So, how did I do one year ago with my forecasts for the first and second half of 2017?

Bottom line: not too shabby.  This post is up over at XE.com.

John Hinderaker and Steven Hayward Are Actually Becoming More Economically Incompetent With Age

First of all, let's all remember that Powerline has the worst record when it comes to discussing economics.  As I pointed out several years ago, they spent an entire year getting literally everything wrong. 

So, they're now at it again over the latest changes to the tax code from the Republicans in Congress.  There's just one problem: there is actually little correlation between tax rates and growth.  "But the economy grew after the Reagan tax cuts!" you respond.  Actually, cutting interest rates (again, econ 101 here) had a little more to do with that than you think.  And then there's this:

This chart that shows the highest marginal tax rate (in blue, left scale) and the Y/Y percentage change in GDP growth (in red, right scale).  Notice that the red peaks are in fact higher when taxes are higher, completely contradicting Powerline's argument.

     And then there's this little scatter plot from Jared Bernstein (someone who has actually studied economics):

There is no statistical correlation between tax rates and per capita GDP growth.

Now, this analysis involves data, facts, and math -- three areas where all the Powerline contributors are deficient.  Also remember they're political sycophants -- if the Republican party said, "The sky is now pink," all the guys at Powerline would dutifully write, "The sky is pink."  In other words, it will go over their heads.  And even if they (or their readers) could understand it, they wouldn't listen because it runs against Republican orthodoxy.  

But for those of us who still use data, facts, and statistical analysis, it should be helpful.

Five graphs for 2017:final update

 - by New Deal democrat

At the beginning of the year, I identified 5 trends that bore particular watching, primarily as potentially setting the stage for a recession in 2018. Now that the year is ending, how did they turn out?

#5 Gas Prices

One potential pressure point on the economy was gas prices, which appear to have made a long- bottom in January of 2016. As they began to rise, consumer inflation has increased from non-existent to almost 3%. So the issue was, will they rise even further and drive inflation even higher?

Typically it has taken a 40% YoY increase in gas prices to shock the consumer.  Gas price increases did briefly approach that point early in the year, but then, with the exception of a brief spike after the Texas hurricane, they retreated. They are only a little higher YoY now:

There's no pressure on customer's wallets at all from gas prices.

#4 The US$

Another potential pressure point on the economy in 2015 was a big increase in the relative value of the US$, which was part of the shallow industrial recession of 2015.  The $ started to rise again after the November election.  Here too the data has calmed down again, and indeed gone the other way:

#3 Residential construction spending vs. mortgage rates 

Another data point which rose sharply after the November election was interest rates.  Generally speaking, home building changes in the opposite direction of interest rates.  So would the increase in interest rates (e.g., mortgages) cause new residential construction to back off?

The slowdown duly appeared after the first couple of months of 2017, and continued through September. In the last two months, housing has increased strongly.  This hasn't quite filtered through to residential construction spending:

Residential contruction spending is a very smooth, un-noisy series, but it does lag permits and starts by a few months,. Note that typically it has taken a big change in mortgage rates about 9 to 12 months to feed through into residential contructioni spending. so we are probably at about peak impact now.  This isn't going to roll over either.

#2 The Fed Funds  rate vs. consumer inflation

If consumer inflation rose past the magic 2% Fed target, would the Fed chase it?  Apparently it didn't matter. Inflation briefly did spike close to 3% YoY due to the increase in gas prices early this year, and the Fed duly hiked.  But it hiked again even after consumer inflation fell back down under 2%, which increasingly looks like a real ceiling in the Fed's calculations:

The yield curve has begun to compress, but it is still positive. Still, it will be difficult to avoid an inversion in interest rates should the Fed stay on its current course with several more hikes.

#1 Real retail sales vs. real average hourly earnings

The final graph came  from my "alternate" recession forecasting model which turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). The long term relationship has been that sales lead jobs, and jobs lead nominal wage increases, but real sales vs. wages are somewhat more nuanced. In the inflationary era, through the early 1990s, YoY wareal wage growth actually slightly led sales. In the deflationary era that dates from the alter 1990s, if anything the two are a mirror image, but in every case but 2001 (where real wage growth just decelerated rather than declined), both have been negative going into recessions. The below graph shows the last 20 years::

I would expect to see both sales and wages stall out before the onset of the next recession. Wage growth has weakened in recent months, and wage growth is now barely above zero. Meanwhile consumer spending has increased YoY, as the personal savings rate has decreased by about 1% in the past year.  While consumers are incresingly vulnerable to any inflationary shock, none has happened yet. 

This  has been "the little expansion that could," dodging bullet after bullet in the 8 1/2 years since it started.  If it continues another 15 months or so, it will become the longest expansion in history. None of the potential concerns from 12 months ago have come to fruition.

Next week we'll start looking at five noteworthy graphs for 2018.

My Columns Are Up at XE.com

Bond market year in review

The US economy ends the year on a high note

Weekly Indicators for December 18 - 22 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

There is what passes for turmoil in my dry and nerdy world among the long leading indicators.

Personal spending and new home sales: restrain your enthusiasm!

 - by New Deal democrat

We got the last two significant data points of the year this morning: personal spending and new home sales.  Both rose significantly. BUT there are big drawbacks to each.

First of all, take a look at the personal savings rate:

It just made a new low, at 2.9%, for this expansion.  On the one hand, this is a concrete measure of consumer confidence, in that consumers are comfortable spending more of their income. But at the same time, a big decrease in the savings rate, such as we have had over the last 16 months, tends to happen later in expansions, and makes consumers more vulnerable to any inflationary shock.

Similarly, new home sales had a big +17.5% monthly jump in November.  Here's what the data for both new and existing home sales looks like (note FRED hasn't updated with this morning's number yet):

BUT... new home sales are one of the most drastically revised of all numbers.  And the big jump to 685,000 in October was revised all the way down to 624,000! Meaning that October did not set a new expansion high after all.

I suspect a similar revision is in store for November.  Here's why: take a look at the chart below showing new home sales broken down by region:

Look at the huge, ~50,000 jumps for the South and the West.  The South might make sense if it is still a post-hurricanes rebound.  But does anyone seriously think there was a 30% jump in a single month in the West?!? So I strongly suspect we're going to get another big downward revision next month.

Next week I'll post a final update on my "Five graphs for 2017" along with a review of the 2017 forecast I made one year ago. After that, in the new year, I'll consider whether or not the US economy is actually entering a Boom.  See you then!

The bond yield conundrum: 100 years of spreads

 - by New Deal democrat

As I mentioned the other day, we have data going back nearly 100 years on the relationships between short and long rates, and between corporate bonds and treasuries. I'm looking at this because the yield curve never inverted between 1932 and 1954, during which time there were 5 recessions, one of which (1938) was severe.

Last time I showed you the data since 1980 when the disinflationary trend started, so now let's look at the last deflationary period of the 1920s and 1930s, and the inflationary period from the end of World War 2 to 1980.

Let's start with the deflationary 1920s and 1930s:

The US Treasury bond trend looks very similar to the last decade. Over a 20 year period, yields fell gradually from 4% to 2%, with barely a blip during either of the two severe recessions during that period.  Meanwhile BAA corporate yields were much more volatile, but gave little warning of the 1938 recession, and none at all in 1926.

Here's what the spread between the two looked like, compared with the NY Fed's discount rate. Note that prior to 1934, the regional Feds set their own rates. After that, the NY Fed rate and the national rate were identical:

Discount rates were raised, ultimately sharply, in the late 1920s, but were completely flat prior to the deep 1938 recession. "Real" rates were positive only because the spread declined. Further, the spread between corporates and Treasuries gave only a few months' warning prior to both severe recessions.

Now let's look at each decade separately from the end of WW2 to 1980:

With the exception of the first half of the 1960s, there is a rising trend throughout this era, with sharper rises in the years just before recessions.

Now here are spreads and the Fed funds rate (overlaid with the NY Fed discount rate in the 1950s):

This is the classic postwar Fed, raising rates significantly as the economy exhibits inflation, and lowering them as the recession takes hold.  Meanwhile the spread between corporates and Treasuries gives us much more notice, making a bottom in roughly the mid-part of expansions or even earlier, with the sole exception of 1953.

Looking back over 100 years of data, we see that usually (with the  pointed exception of 1938) the Fed is raising rates, by a smaller amount in deflationary environments, and a larger amount during inflationary environments.  In fact, the information is more useful if we look at the "percent of a percent," e.g., an increase from 1% to 2% is a 100% increase:

Further, during deflationary environments, waiting for an increase in spreads gives us much less notice of an oncoming recession, and even then the increase is well within the range of noise.

Well, we certainly have the Fed raising rates now, and as a "percent of a percent" at the highest rates ever, but the spread is close to all time lows.

What we still want to take a look at is real, inflation-adjusted rates.  That's next.

Why Would Anybody Invest When Capacity Utilization is This Low?

A central selling point of the tax bill is that it will encourage investment.  But that assumes that high tax rates were the primary reason why business wasn't investing.  Instead, the data says business investment is weak because the U.S. has a ton of spare capacity.

First, let's look total capacity utilization:

It has peaked at lower levels in each of the last three expansions.

Let's break the data down into durable and non-durable CU:

Both categories of production have ample spare capacity, with non-durable production having greater capacity.

Finally, let's look at crude, intermediate and final stages of production:

All three have plenty of spare capacity to bring online if needed.  

So, will we see a huge wave of investment as a result of the changed tax bill?  The data says no.

How interest rates and the demographic tailwind ended the housing slowdown of 2017

 - by New Deal democrat

Yesterday's report on housing permits and starts confirms that the housing slowdown of 2017 is over.

Based on the last five years, I can make a pretty decent estimate of the effects of the demographic tailwind of Millennials reaching house-buying age.

It's bigger than I thought! This post is up at XE.com.

Five Key Graphs for 2018

This is up over at XE.com

The bond yield conundrum revisited: narrowing corporate spreads vs. a flattening Treasury yield curve

 - by New Deal democrat

Two introductory notes: first of all, next week is the last week of the year including the Christmas holiday, and there will be almost no economic data.  So, light posting, probably including a final update of my "Five graphs for 2017" as well as marking my 2017 forecast to market over at XE.com.

Secondly, in the coming weeks, I anticipate having much to say about the bond market, as I have done a great deal of examining its signals in the background. This is because, while a yield curve inversion has always been bad news, in times low very low interest rates, like the 1930s through mid-1950s, recessions including at least one very bad one (1938) have occurred without an inversion ever occurring.

Turning to my focus today, in my most recent "Weekly Indicators" column, I noted that the crosscurrents in bond yields. BAA  corporate bond yields, but not AAA rated yields, made a new 12 month low, and were just 0.02% above their 50 year lows from July 2016 -- a very bullish sign.  Meanwhile longer term US Treasury bonds have been meandering generally sideways for the last year. This has driven the spread between Treasuries and BAA corporate bonds to a new expansion low.

All of this is against a backdrop of a tightening, but not inverted, yield curve.

This is a very curious set of circumstances, so I went looking to see if it was unique, or something that had happened before. The bottom line is that it has not been unique, although the iterations, over nearly 100 years of data (!) have not been uniform.

On a broader scale, there have been a number of bond market markers that don't include an inverted yield curve, that have typically foreshadowed an economic downturn. Those will be explored in coming weeks.

But on the narrow issue, let me begin by comparing the spread between the more sensitive BAA corporate bonds and 10 year Treasuries, going back 30+ years (blue), and comparing that with the Fed funds rate (red):

Here is the same graph for the entirety of the 1980s:

In general the spread between corporates and Treasuries has declined as the economy strengthens, and risen as it decelerates or weakens. Meanwhile, at some point if the economy is strong enough, the Fed begins a tightening  cycle. In each of the last 4 expansions, the bottom in the yield spread has occurred during the period that the Fed is tightening: 1989, 1994, 1999 (secondarily), early 2005, and now.

When spreads turned higher from these lows, that was a clear sign that the Fed had weakened the economy -- although, in the case of 1994, there was a "soft landing" in 1995 followed by a boom.

Here are breakout graphs for each of the last 4 expansions, comparing BAA yields (blue) , AAA
yields (red), and Treasury yields (green).

Note that the current situation is just like that of early 2005. Then, as now, BAA but not AAA bonds made a new low, in the face of flattish Treasury yields (this was part of Greenspan's "conundrum").

In the two earlier expansions of the 1980s and 1990s, the narrowing of spreads was accomplished via a period of flat Treasury yields (1986, early 1998) with declining corporate bond yields.

I strongly suspect that the current move is due to a belief that corporate profits are about to improve substantially in the wake of the GOP tax bill, particularly aiding less creditworthy companies. I also suspect that this may be a "buy the rumor, sell the news" type of move, where spreads do not further decline significantly, once the Act actually takes effect.

In other words, the decline in BAA yields, and the according decline in spreads is an unequivocal good sign for the present and the short term future as long as one year out. It is only a harbinger of longer term trouble if BAA yields, and spreads, begin to turn back up.

But does this hold up upon examination of earlier economic cycles? As I pointed out at the outset, we have decent data going back all the way to the 1920s.  So I'll look at that next.

Monday Morning Bond Market Round-Up

The Baa-10-year treasury spread (top chart) is at a 10-year low.  This is a leading indicator.  The AAA-10-year spread (bottom chart) is also a 10-year low.  This chart shows that the market is still searching for yield.

After spiking earlier this year, CCC yields (top chart) have come in 45 basis points.  This was a potential problem sign as this section of the bond market is the first to widen when trouble emerges.  But the problem never cascaded out into the BBB market.

The 30-day asset-backed commercial paper spread (top chart) that I wrote about on Friday has come back in.    But it's still in the middle of a short-term uptrend as is the 90-day market (bottom chart).

  

My Columns Are Up at XE.com

International Economic Week in Review

US Economic Week in Review

Weekly Indicators for December 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

A whirlpool of crosscurrents among the long leading indicators has developed.

Why Did 30 and 90 Day Commercial Paper Spreads Recently Blow-Out?

I watch a number of yields for signs of financial market stress.  Above are the charts for the 30-day commercial paper/bill spread (top) and the 90-day commercial paper/treasury spread.  Both recently blew out.

Why?

Industrial production for November 2017: Dear Doomers, you can shut up about "soft" vs. "hard" data now

 - by New Deal democrat

For months and months this year, the mantra of the Doomers was that the "soft data" of the Fed regional surveys and ISM manufacturing wasn't being confirmed by the "hard data" like industrial production.

Meanwhile, those of us who actually know something about leading vs. coincident data placidly kept noting that the new orders data for both leading indicators (the Fed surveys and ISM manufacturing) portended strength -- just as in early 2016 they turned from negative to positive, accurately portending the end of the shallow industrial recession.

And here is Industrial Production (red), and its manufacturing (blue) and mining (green) components through November:

Yes, it doesn't move in a straight line. In particular there were several months of hurricane-related weakness. But the leading surveys have once again been proven correct, and those who listened to the Doomers wrong.

Real retail sales for November 2017 portend positivity for 2018

 - by New Deal democrat

There have been any number of perfectly good and perfectly obvious write-ups of yesterday's retail sales report for November.

I like to think much of  my "value-added" is telling you not about what the data indicates about now, or about the recent past, but what it portends in the near and further-term future, and real retail sales is one of my favorite metrics for thet.

So, here are two 2018 takeaways from real retail sales:

1. Real retail sales per capita adds to the evidence that, left to its own devices, the economy will not enter a recession in 2018.

This number has frequently turned one year or more before recessions, including the last two. The 0.8% retail sales vs. 0.4% inflation, with ~0.06% population growth means it made another new high yesterday:

2. The job market measured YoY should remain steady over the next 3 - 6 months.

This is a relationship I started graphing in the middle of the "Great Recession" in early 2009. Divide real retail sales by 2, and the smoothed trend gives you a good idea where YoY payroll growth is going to trend in the near future:

With the exception of the outsized moves in retail sales just after the recession, the correlation is pretty good, and the directional trend is a close match.  

Bottom line: the recent improvement in retail sales, including the big numbers from October and November, at very least suggest that the employment situation will not soften significantly in the next few months.

P.S.: I'd be inclined to treat the jump in the past several months as a hurricane-related rebound, but no such jump occurred after either Katrina in 2005 or Sandy in 2012.

Real wages stagnate YoY, decline significantly since July

 - by New Deal democrat

So lackluster has wage growth been that even the modest uptick in consumer inflation to 2.2% YoY in November means that non-managerial workers have seen virtually no real growth in their paychecks over the last 12 months.

With yesterday's +0.4% increase in consumer prices, here's what YoY real wages look like for non-managers (blue) and all employees including managers (red):

All wages are up +0.3% YoY, but nonsupervisory workers have seen only a +0.1% increase.

Here is the same data for the last 2 years, set to a value of 100 as of January 1, 2017:

Real wages rose by over 2% through July, but have actually declined since then, up to nearly -1% for all employees.

To look at the economy as a whole vs. individual workers, here is a look at real aggregate payrolls for all employees:

Aggregate payrolls adjusted for inflation rose 2.3% this year through July, and have made zero progress since.

This doesn't mean that we're DOOOMED, but on the other hand since workers have already dipped into their savings in the past year (the savings rate has declined by over 1%), consumers are ill prepared should anything like a spike in gas prices occur soon.

The Long-End of the Curve Isn't Predicting Booming Growth

The chart above plots 10 years of the 10-year CMT (left scale) and the Y/Y percentage change in GPD (right scale).  Notice the following general trends:

1.) The 10-year has moved lower since the recession.  In the second quarter of 2009, the 10-year came close to 4%.  It is currently in the 2.3-2.4 range. 

2.) In absolute terms, the 10-year yield increased more than 100 basis points between the summer and fall of 2017, rising from 1.37% to 2.6%.  Traders called this the "Trump trade."  They believed that Trump would increase fiscal spending (largely on infrastructure) and lower taxes.  The combination would increase growth and inflation, hence the sell-off in the long-end of the bond market.  Since the election, yields have trended lower, incating the "Trump trade" is losing steam.

3.) The Y/Y percentage change in GDP has mostly printed between 2%-3% since 2010.  Weaker GDP growth is a function of slowing population growth, lower productivity, and the "debt-deflation" growth dynamic that characterized this expansion. 

4.) Yields are fluctuating between ~2% and ~2.6% -- hardly a level indicating booming growth.  This means bond traders are thinking, "more of the same is coming."

US Bond Market Week in Review: The Fed Is Chasing an Inflation Ghost

This is over at XE.com

(Special thanks to NDD for getting me on the specter/ghost angle)

The Phantom Menace: Fed rate hikes and non-existent inflation

 - by New Deal democrat

This isn't the first time the Fed has engaged in a rate hiking campaign in the face of somnolent inflation.  There were are least three prior episodes.

I take a look at the reaction of the bond market and the economy over at XE.com.

The Ugly Picture of US Wage Growth

The chart above shows the Y/Y percentage change in the average hourly earnings of nonsupervisory employees.  We can break this data down into two sections.  Due to higher inflation and stronger unions, the pace of growth was far stronger before the 1980s.

We see a different dynamic at work during the first three post-1982 expansions.  Wages decline coming out of the recesssion, falling to ~2% Y/Y percentage growth rate.  They then climb during the second half of the expansion, peaking ~4% Y/Y percentage growth rate.  This probably explains why the Fed remains thoroughly convinced that the Phillip's Curve is still in play: they're assuing the past is prologue, and with good reason.

However, this expansion we see a different growth dynamic at work.  As before, the Y/Y percentage change dropped to 2% a little before the expansion was halfway over.  But the pace of growth in the second half of the recovery is far weaker.  Hence, we have weaker wage growth.

Here's a graph of the average and median growth rate of wages for each of the expansions:

The pace is clearly declining.  

  

October JOLTS report: a good post-hurricane rebound

 - by New Deal democrat

The August and September hurricanes continue to make their impacts felt in the economic data.  Yesterday's JOLTS report for October, like the October and November jobs reports, shows a rebound from those impacts.  The best way to look at the data is to average the last two months (and this will be true for the next JOLTS report as well, which will be best viewed by averaging all three months).

Let's start as usual by updating the disconnect between the "soft data" of openings in this survey and the "hard data" of actual hires and discharges. As I have pointed out many times, openings can be just chumming the water for resumes, or even laying the groundwork to hire foreign workers. The disconnect betrays an unwillingness to pay new hires more, or to engage in on the job training.

In October. openings continued to run about 10% higher than actual hires:

Hires have been basically flat for the last 2 years -- specifically since December 2015 -- while openings have continued to increase, although they too have been flattish for the last 5 months (especially if we average the last two months):

One of my mantras is that hiring leadis firing. To reeiterate, the major shortcoming of this report is that it has only covered one full business cycle. In that cycle, in acord with my mantra, hires peaked and troughed before separations: 

Further, in the previous cycle,  hires stagnated, and shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

 

[Note: above graphs show quarterly data to smooth out noise]

Here are hires vs. separations on a monthly basis for the last several years (again, mentally aveerage the last two months). At this point both hires and separations are tracing a similar trend over the last 24 months:
 

While quits remain at expansionary high levels, involuntary separations bottomed a year ago, and have risen  on a quarterly basis ever since.  Here's the monthly view of the last several years. The good news is that involuntary separations have fallen in the last several months, even if we average the last two. At the same time, they remain above thei bottom they established a year ago: 
 

Finally, while  the JOLTS  data is not broken up by states, so it is impossible to know the precise impact of the hurricanes, because the data is broken down by Census Region, we can exclude the Southern Region and see what was going on in the rest of the country, which was not affected.  I've prepared that for openings, hires, quits, and layoffs and discharges below (and helpfully marked the expansion highs (low for layoffs)  with an "H" (and "L") symbol): 

Month	Openings	Hires	Quits	Layoffs/ discharges
9/16	3595	3158	2042 H	975
5/17	3640	3350	1895	922 L
6/17	3882	3224	1849	1078
7/17	3897	3416	1822	1113
8/17	3965	3253	1888	1127
9/17	3935	3174	1903	1070
10/17	4099 H	3529 H	1875	1066

This is pretty impressive. It shows that outside of the South, both openings and hires are at new highs, and involuntary separations have receded. The only sore spot is quits, which peaked over a year ago, although they have improved compared with earlier this year.

The report yesterday was a good one, but on the other hand, it is very consistent with being late in the cycle.