Weekly Indicators for January 2 - 6 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The indications for the first half of 2017 are really strong, but out on the horizon mortgage applications just turned negative.

December jobs report: a positive report to close Obama's Presidency

- by New Deal democrat

HEADLINES:

• +156,000 jobs added
• U3 unemployment rate up +0.1% from 4.6% to 4.7%
• U6 underemployment rate down -0.1% from 9.3% to 9.2%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: down -176,000 from 5.876 million to 5.662 million  
• Part time for economic reasons: down -64,000 from 5.662 million to 5.598 million
• Employment/population ratio ages 25-54: up +0.1% from 78.1% to 78.2% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.07 from $21.73 to $21.80,  up +2.5% 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.)

October was revised downward by -7,000, but November was revised upward by +26,000, for a net change of +19,000. 

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 positive.

• the average manufacturing workweek rose 0.1 from 40.6 to 40.7 hours.  This is one of the 10 components of the LEI, and is a positive.
 
• construction jobs decreased by -3,000 YoY construction jobs are up +102,000.  
 
• manufacturing jobs increased by +17,000, but are down -45,000 YoY

• temporary jobs decreased by -15,500.


• the number of people unemployed for 5 weeks or less decreased by -36,000 from 2,415,000 to 2,379,000.  The post-recession low was set over 1 year ago at 2,095,000.

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

• Overtime rose +0.1 from 3.2 to 3.3 hours.
• Professional and business employment (generally higher- paying jobs) increased by +15,000 and are up 522,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.2  from  105.8 to 106.0 

•  the index of aggregate payrolls rose by 0.7 from 131.0 to 103.7. 

Other news included:         

• the alternate jobs number contained  in the more volatile household survey increased by  +63,000 jobs.  This represents an increase  of 2,811,000  jobs YoY vs. 2,157,000 in the establishment survey.    
   
• Government jobs rose by +12,000.     

• the overall employment  to  population ratio for all ages 16 and up was unchanged at  59.7%  m/m  and is up +0.1% YoY.   
• The  labor force participation  rate was unchanged at  62.7% and is also unchanged YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY 

This was a nearly uniformly positive report. While the headline unemployment rate rose slightly, and there were some downward revisions to last month's strongly positive household survey numbers, the broader underemployment rate continued its recent strong decline.  Hours and wages increased.

As Barack Obama closes out his Presidency, his record on jobs (as a share of the prime working age population)  and aggregate wage creation is nearly that of Ronald Reagan's.  The weak points remain a participation rate for the working age population that never made it back more than 2/3's of the way to last 2007 high, and wages that never increased more than 2.6% YoY.  Since wages gains YoY typically fall by about that percentage during recessions, I continue to fear that the next recession will include actual wage deflation, with the possibility of a wage/price deflationary spiral.

  

Jazz Shaw, the Frank Burns of Policy Analysis, Once Again Demonstrates His Ineptitude

     I grew up on MASH.  During one episode, someone asks Hawkeye what Frank Burns knows on a topic.  Hawkeye responded, "there's so little Frank knows, it's difficult to keep up with what he doesn't know." 

     That statement encapsulates Jazz Shaw of Hot Air in a nutshell.  For several years now, he has sided with those who oppose a minimum wage hike, arguing that an increase in the minimum wage causes unemployment.  This argument was neutered by Alan Kreuger in the early 1990s -- as anyone who pays attention to silly things like facts and data will tell you.  The recent experience of Seattle and it's minimum wage increase confirmed Kreuger's analysis and rebutted Mr Shaw's position.  However, Kreuger's literature and economic data have the added feature of being complex and nuanced, immediately placing it outside Mr. Shaw's intellectual capabilities.  Rather than reevaluate his position, Mr. Shaw has done what most conservative bloggers do: stop writing about the topic on which reality has shown him to be wrong and move onto another topic.  

     Yesterday we had this beauty from Mr. Shaw:

We had a functional, if highly problematic health care system in this country before the Affordable Care Act was passed and we will still have one when it’s gone. Far more to the point, Obamacare did not “fix” the healthcare system in this country. It blew it up in several significant ways, not least of which was the exponential increases in premium costs and the large number of healthcare providers who wound up kicking out their satisfied patients because they wouldn’t accept Obamacare coverage.

     As with all of Mr. Shaw's policy writing, data, facts and references are completely absent.  Instead, he offers his position and, because it jibes with that of his readers, it goes unchallenged until now.  

     Let's first note that insurance premiums were a huge problem before the ACA.  The following is from the Economic Policy Institute and Kaiser Family Health:

Insurance premiums increased at alarming rates before the ACA resulting in health care premiums taking an increasing percentage of median family income.  As a matter of fact, premium increases were far lower after the ACA:

As for Mr. Shaw's contention that the pre-ACA health system was functional, we have this:

The Blue Cross Blue Shield Association released a widely publicized report last month that said new enrollees under ObamaCare had 22 percent higher medical costs than people who received coverage from employers.

.....

The Aetna CEO noted concerns about the “risk pool,” which refers to the balance of healthy and sick enrollees in a plan. The makeup of the ObamaCare risk pools has been sicker and costlier than insurers hoped. 

One of the ACA's biggest problems is that far more sick people signed up than anticipated by insurers.  This indicates that before the ACA, there was a very serious problem: people weren't going to the doctor.  And the reason is simple: they lacked insurance.  

For a long amount of time (~35 years) a significant percentage of Americans didn't have insurance.  Therefore, they didn't get routine problems taken care of.  When they finally got insurance, they had a lot of problems that had morphed into huge issues because they hadn't gotten them taken care of.  This problem could have been avoided with broadened insurance coverage.

     And if the U.S.' system was "the best: why did it cost so much more than other countries' health care?

   

     I could go, but you get the point.  As usual, Mr. Shaw cites no data nor evidence to back-up his primary assertion.  This is standard for Mr. Shaw, because he lacks any formal training in policy analysis, economics or even basic logic.  He does, however, excel at stupidity, which he routinely displays.  He also clearly lacks a sense of shame, because someone who has been as consistently incorrect as Mr. Shaw usually has the good sense to shut up.  He does not.   So, we can expect to see more articles from him as he defends his new master, Mr. Trump.  

  

Five graphs for 2017: #2, inflation and the Fed funds rate

 - by New Deal democrat

This is the fourth of five metrics I'll be paying particular attention to this year.

The first three are the "troika" of issues that could lay the basis for the next recession: higher gas prices (#5), a surge in the value of the US$ (#4), and higher interest rates (#3).

At least 2 of the above 3 metrics are connected to the inflation rate.  For the last 16 years, the waxing and waning of consumer inflation has primarily been driven by gas prices.  Further, the spike in interest rates appears to reflect a belief that the actions taken by the incoming Administration in Washington will be inflationary.

Against that backdrop, we have a Fed that officially has a "target" of 2% inflation, but in practice appears to treat 2% as a ceiling.  It did not appear concerned at all by the nonexistent inflation of 2015, but since 2014 at least has been talking of calibrating interest rates to achieve a"gliding into" the 2% inflation target.

So graph #2 for 2017 is YoY CPI and the Fed Funds rate.  Here it is for the last 50 years:

Typically the Fed has chased late cycle inflation higher.

Here's a close-up of the last 5 years:

If consumer inflation, driven by an increase in gas prices, goes over 2% in the next few months (which I consider likely), the Fed certainly sounds like it will chase it, and raise interest rates multiple times.  If so, that will set the stage for the narrowing of the currently relatively steep yield curve.

[Note:  since tomorrow is the jobs report, I will post the #1 graph next week.]

Five graphs for 2017: #3, interest rates vs. residential construction

 - by New Deal democrat

For the last few years, I have picked out five metrics that particularly bear watching at the outset of the year.  This year, there is a troika of factors that could bring about the next recession: a big increase in gas prices (#5 on this year's list), a surge in the US$ (#4), and -- today's installment -- a spike in interest rates

In 2013 as the result of the "taper tantrum," Treasury yields went from just under 1.5% to just over 3%.  Mortgage rates rose similarly, leading to a near stall in the housing market.  The pent-up demand from the large Millennial generation kept the market from an outright downturn.

Since the US presidential election, Treasury yields similarly spiked, so far to a high of just over 2.6%.  In response, finally this week, mortgage applications turned negative YoY.

So graph number 3 is mortgage rates (inverted) vs. residential construction (shown YoY below):

Although residential construction is a little less leading than permits, housing starts, or new home sales, it has the advantage of being a much less noisy series (shown in comparison with permits below):

Private residential construction has gone basically sideways since September 2015 (and thus is flat YoY in the first graph above), although post-Brexit there has been some improvement.  I expect this series to continue to improve until sometime next spring when the post-election spike catches up with it.

The issue this year will be whether mortgage interest rates continue to rise, and if so, do they rise enough to cause an outright downturn in the housing market.  That's what I'll watch in this graph.

Will Inflation Be the Story of 2017?

From Bloomberg:

While the ISM sub-indexes can be volatile, the jump in prices caught the eye of factory managers and analysts, with survey chairman Bradley Holcomb noting it was “clearly something to watch” at the beginning of the year. A broad-based increase in costs of inputs for production corroborates signs of higher consumer inflation. The personal consumption expenditures price index -- the Federal Reserve’s preferred gauge -- is up 1.4 percent on a year-over-year basis, the fastest gain since 2014.

Even with the increase in the ISM price index, it’s far below levels from times associated with rapid inflation. The gauge averaged a 73.7 reading in 1980, when the consumer-price index averaged a 13.6 percent rise. The ISM price index reached a post-recession high of 85.5 in 2011, coinciding with a post-recession high in crude oil and faster gains in the Fed’s preferred index.

From the Financial Times

Germany’s annual inflation rate has surged to its highest level in more than three years, defying economist forecasts to hit 1.7 per cent in December in a release that is likely to embolden German critics of stimulative monetary policy in the eurozone.

From Bloomberg:

A barrel of West Texas Intermediate traded above $55 this morning, the highest level for the contract since July 2015. The rise comes after local media in Kuwait reported that the country has cut output by 130,000 barrels a day, a sign that the OPEC deal to reduce production may be implemented successfully. In the U.S., drillers added rigs for the ninth week, boosting the number to the highest in about a year. 

From Wednesday's Eurostate Release: note energy prices

Chart of the 5 and 10-year Breakeven Inflation Rates

1- year Chart of10 and 30-year CMTs

Fiive graphs for 2017: #4, the US$

 - by New Deal democrat

This is the second of five graphs that bear watching in 2017.  

The first was gas prices.

The second part of the troika that may lay the basis for the next recession is the US$. Almost 100 years ago, economist Irving Fisher identified the strength/weakness of the currency as being an indicator that led the economy by about 7 months (in the below paragraph, P' is the YoY change in prices, and T is the currency value):

In 2015 we saw how the surge in the US$ depressed commerce even as lower gas prices helped consumer spending.  Since the US presidential election, the US$ has had a lesser surge (so far) based on fears that a trade war particularly with China may be in the offing.  Typically negative effects have not been felt until the US$ is up at least 5% YoY against other currencies:

As of last week the US$ was up 5% globally, although not against major currencies.

Needless to say, if both gas prices and the US$ spike, unlike 2015 both consumers and producers will take a hit.

Five graphs for 2017: #5, gas prices

 - by New Deal democrat

In the last couple of years, I have identified a few relationships that I thought were particularly worthy of being followed over the next 12 months.  Usually these have been metrics that had been at near extremes, or showed signs of approaching a turning or inflection point. 

The first such important metric for 2017 is gas prices, one of a troika that together may set the stage for the next recession.

After the "great recession," these quickly returned to nearly $4 per gallon for several years, acting like a "choke collar" on growth.  Every time the economy looked like it was taking off, gas prices would rein in other consumer spending.

In 2014 gas prices fell precipitously, to as low as about $1.69 at the beginning of 2016.  Throughout last year, it appeared gas prices (which tend to show lots of seasonality) were bottoming -- and they finally turned positive YoY late in the year, as shown in red in the graph below (actual prices per gallon are shown in blue):

Normally gas prices have had to increase 40% or more YoY to create any kind of "shock."  As of now, they are only up about 15% YoY.

I'll be keeping tabs on this metric to see if prices go up near $4/gallon again, and if they are up more than 40% YoY.

An Absolute Must Read on Foreign Policy

From Politico.  This article is the first I've seen (there, of course, may be others) that explains Putin's game.  It's scary as hell, but one that we all should read.

Putin's Long Game