Weekly Indicators for July 31 - August 4 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Once again, all stages of indicators are positive.

July jobs report: across the board solid

- by New Deal democrat

HEADLINES:

• +209,000 jobs added
• U3 unemployment rate down -0.1% from 4.4% to 4.3%
• U6 underemployment rate unchanged 8.6%

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 -11,000 from 5.431 million to 5.420 million   
• Part time for economic reasons: down -44,000 from 5.326 million to 5.282 million
• Employment/population ratio ages 25-54: rose 0.2% from 78.5% to 78.7% (a new post-recession high)
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 from $22.04,  to $22.10, up +2.4% 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.) 

Holding Trump accountable on manufacturing and mining jobs
 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise? 

• Manufacturing jobs rose by 16,000 for an average of +5,500 vs. the last severn years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
• Coal mining jobs fell by -200 for an average of +100 vs. the last severn years of Obama's presidency in which an average of -300 jobs were lost each month

May was revised downward by -7,000. June was revised upward by 9,000, for a net change of +2,000.  

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 was unchanged at 40.9 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by 6,000. YoY construction jobs are up 191,000.  

• temporary jobs increased by 14,700.


• the number of people unemployed for 5 weeks or less decreased by -172,000 from 2,305,000 to 2,133,000.  The post-recession low was set 18 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 hours.
• Professional and business employment (generally higher- paying jobs) increased by 49,000 and is up +580,000 YoY.


• the index of aggregate hours worked in the economy rose by  0.2 from 107.4 to 107.6   

•  the index of aggregate payrolls rose  by 0.7 from 134.9 to 135.6.   

Other news included:          

• the  alternate jobs number contained  in the more volatile household survey increased by   345,000   jobs.  This represents an increase of 1,967,000  jobs YoY vs. 2,159,000 in the establishment survey.     
    
• Government jobs rose by 4,000 .     

• the overall  employment to  population ratio for all ages 16 and up rose  0.1% from   60.1% to  60.2  m/m  and is  up +0.4%  YoY.      
• The  labor force participation  rate rose  0.1%   m/m and is up +0.-% YoY from 62.8% to 62.9%.       

 SUMMARY  

This was a solid report in both the headline numbers and the internals. Literally the only negative was the decline in coal mining jobs (a Trump promise that is so far going nowhere). Aside from that, the "worst" was that a few things like the unemployment rate were unchanged, and -- of course -- that wages are still pathetic for this stage of an expansion.

But this month we can celebrate not just a good jobs number, but also a new expansion high in participation, nearly a new low in short term unemployment, a new low in those who are not in the labor force at all but want a job now, and the involuntarily employed part-time. Just a solid report.

Consumer durable purchasing (houses and cars) stalls

 - by New Deal democrat

Along with corporate profits in the producer sector, the other two nonfinancial leading sectors are those consumer durable purchases of houses and motor vehicles.  Consumers typically cut back on these before producers notice.  Once they do, production turns down and a recession begins.  This is the same idea behind noting that in the inventory to sales ratios, typically first sales turn before inventories turn -- it takes a little while for producers to take note of the consumer change in demand.

With Tuesday's July motor vehicle purchase data, let's take a more detailed look at each.

In the first place, vehicle purchases continue down from their expansion peak of just over 18 million purchases annualized (h/t Calculated Risk):

All this year, vehicle sales have been running between 16 and 17 million annualized. It would take a number below 16 million to be concerned that a consumer-led recession might be near.  So the news here is mixed.

The news on housing is similarly mixed, but again by most measures has backed off from its expansion peak.

The two least noisy series I have found are single family permits (blue i the graph below), and the even less noisy but also less leading residential construction (red):

Single family permits made a peak in winter. Residential construction has now followed. It is important to note, however, that single family permits stalled at least twice before in this expansion, in late 2013 through early 2014, and late 2015, without signaling an economic downturn. 

Turning to the four typical monthly measures of the housing market -- permits, starts, plus new and existing home sales -- we see that total permits and starts, with the exception of Q4 of last year and Q1 of this year, have made no progress at all in two years. Existing home sales are up about 5% in the  last two years.  Only new home sales has grown about 10% YoY over the last 8 quarters.

Median home prices for new houses have continued to trend higher, but at a decelerating rate over the last several years, while new home prices continue to rise at roughly a 5% YoY pace:

With the stalling of sales by most measures, I would expect prices to follow, as they typically have in the past. Here's a graph I haven't posted in years -- the NAR affordabililty index:

[Updated with 2017 vs. 2016 graph]

It appears that existing home sales are being affected by affordability. With foreign buying declining, I do not expect prices of new homes to continue to rise much further either.

In summary, with the exception of single family new home sales, there is nothing in either of the two leading consumer sectors suggesting any positive input into the economy as we move into 2018.

Rasmussen poll shows GOP losing midterms in a wave

 - by New Deal democrat

I like K.I.S.S. methods, and I have decided that the easiest K.I.S.S. guide to the midterm elections is likely to be Rasmussen's "net strong disapproval" spread.  The theory is that while voters who even weakly approve or disapprove of a President are likely to come out and vote in the Presidential election years, only those with strong opinion -- a substantially smaller number -- come out to vote in midterm elections.

Here's what Rasmussen's net disapproval and net strong disapproval looked like during the Obama years:

Obama had a 1:1 approval vs. disapproval spread on Election Day 2012 (vertical red line), and managed to win re-election.

But on Election Days 2010 and 2014, for every 100 adults who strongly disapproved of Obama, there were only 60-65 and 55 adults who strongly approved of his performance -- enough for a GOP wave in each case.

Over the last few months, Trump's net strong disapproval ratings have gotten progressively worse:

And today, for the first time, the ratio of strong disapprovers to strong approvers hit 2:1:

Worse for the GOP, the 50%  strong disapproval means that if those people come out to vote, literally the GOP cannot win.

Rasmussen's index is only a nowcast, not a forecast, but if the polling 15 months from now is as bad as it is today, the GOP's only hope of not losing its House majority is its ruthless gerrymandering and voter suppression.

Update for long leading indicators - most still positive

 - by New Deal democrat

While several of the long leading indicators have turned negative, a majority are still positive.

This post is up at XE.com.

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On health care, is it time for "skinny improvement?"

 - by New Deal democrat

While I don't think the GOP assault on Obamacare is over for the long term -- for example, if they pick up at least a couple more Senate seats in 2018 -- the crisis appears to have passed for the moment.

That being said, there are some significant problems with the Act as it stands.  In particular, the individual market in a few states needs shoring up. And just about everybody hates the individual mandate for one reason or another..

Since the 3 Senate GOP dissenters, the few others who expressed severe doubts, and perhaps members of the GOP House's "Tuesday group," might be open to working with democrats, maybe there is at least some narrow ground for agreement to fix a few problems and make health care insuance better.

Call it "skinny improvement."

What would "skinny improvement" of the ACA look like? Here are 4 things I think are within the realm of reasonable possibility:

1. codifying the Cost Sharing Reduction payments to insurers to stabilize the markets and preclude Executive caprice.
2. replacing the individual mandate with an automatic payroll deduction, or self-employment tax, for those not covered by employer healthcare or a chosen individual plan. The payments in the automatic deduction could qualify the individual for Medicaid, or perhaps go to a bronze plan insurer, e.g., the lowest priced plan in the employee's state. 
3. establishing a catastrophic insurance fund for exceptional cases, such as the Iowa boy whose $12 Million annual bill has singlehandedly caused all of the insurers to flee the market in that state.
4. allowing a Medicare buy-in for those age 62-64.

Of course, to enact "skinny improvement" both Ryan and McConnell would have to permit it to come to a vote, even though a majority of their respective caucuses would presumably be in opposition. And to assure the President doesn't use his veto, we would probably have to name it something like the "Donald J. Trump Healthcare Enhancement and Obamacare Repeal Act."

But if doing nothing is not an acceptable option, then "skinny improvement" looks like the narrow way forward.

Apartment vacancy rate improves, but "rental affordability crisis" at worst level ever

 - by New Deal democrat

Over three years ago HUD warned of "the worst rental affordability crisis ever," citing statistics that

About half of renters spend more than 30 percent of their income on rent, up from 18 percent a decade ago, according to newly released research by Harvard’s Joint Center for Housing Studies. Twenty-seven  percent of renters are paying more than half of their income on rent. 

This is a serious real-world issue. I have been tracking rental vacancies, construction, and rents ever since.  The Q2 2017 report on vacancies and rents was released last week, so let's take an updated look.

After stopping for a year, in the second quarter median asking rents zoomed up over 5% from $864 to $910.  Meanwhile, surprisingly weekly wages declined from $865 to $859.. The combined effect is that rent has become more unaffordable than ever.

The big jump in median asking rents in the second quarter can be easily seen in the below graph: 

Here is an updated look at real. inflation adjusted median asking rents, showing that after abating a bit for a year after Q1 2016, rent pressures on household budgets spiked in the second quarter:

Year	Median Asking Rent	Usual weekly earnings	Rent as % of earnings
1988	330	382	86
1992	401	437	92
1993	422	450	88
2000	478	568	84
2002	545	607	90
2004	599	629	95
2009	680	739	92
2012	717	768	93
2013	734	778	94
2014	762	791	96
2015	813	809	100
2016  H1	859	826	104
2016 H2	853	839	102
2017 Q1	864	865	100
2017 Q2	910	859	106

The big increase in unaffordability is a nasty surprise, eespecially since the vacancy rate appears to have bottomed over a year ago, so while apartment availability is still relatively tight,  the level of stress has decreased a little: 

It is worthwhile to note that the CPI for owner's equivalent rent, the major component of inflation, remains near the highest levels in a decade, although it has backed off a little this year: 

 There are two other median measures in addition to median asking rent from the HVS:   the American Community Survey and the Consumer Expenditure Survey.  Unfortunately both are only current through 2015.  The below table shows their YoY increases, compared with median asking rent:

SURVEY: ACS        CES      HVS

2009 --------  (817)    -------     ------  (708)
2010  +2.9%  (841)   +1.4%   +2.6% (698)
2011  +3.6% (871)    +4.4%   -0.6%  (694)
2012  +2.1% (889)    +5.2%  +3.3% (717)
2013. +1.7% (904)    +4.7%  +2.4% (734)
2014  +1.8% (920)    +9.2%  +3.8% (762) 

2015  +0.9% (928)    +4.3%* +6.7% (813)

Finally , HUD recently premiered a Rental Affordability Index,, using the ACS data. Similar to my chart above, it compares median renter income with median asking rent. Please note, however, that this has only been updated through Q1 of this year: 

Like the median household income data, this shows renters' income bottoming out in 2011-12, and rising since relative to rents as calculated by the ACS.

That gives us the "renatl affordability index" shown below:
.

I'm not sold on HUD's method, mainly because it relies upon annual data released with a lag. In other words, the entire last year plus is calculated via extrapolation.  I suspect we could get much more timely estimates using Sentier's monthly median household income series, compared with the monthly rental index calculated by Zumper. It will be interesting to see if HUD confirms the Homeowner Vacancy Survey's jump in UNaffordability when it releases its Q2 data soemtime later this quarter. 

The takeaway from this quarter's report is that, while the crunch in vacancies has probably passed peak, the "rental affordability crisis," which had appeared to be abating at least a little, has come back with a vengeance.

US Equity and Economic Week in Review: The Economy Rebounds from Recent Data Softness

            Unlike several weeks over the last few months where pieces of the economic releases were moderately weaker, this week’s news was solid.  Second quarter GDP rebounded from its weak first quarter pace, the housing market remains in good shape and durable goods orders increased (although transportation orders had a great deal to do with this number).  As for the markets, second quarter earnings season is well underway and results have been positive.  The markets have reacted accordingly moving modestly higher.  As has been the case however for the last 24 months, the market remains expensive meaning upward movement is constrained by the combination of high PE ratios and revenue growth.

            On Friday, the BEA released their first estimate of second quarter GDP, which grew at a 2.6% annual rate.  This was a marked improvement from the 1.2% annual growth rate of the first quarter.  Personal consumption expenditures (PCE’s) provided a noticeable boost: after increasing a paltry 1.9% in the first quarter, they rose a far more robust 2.8% in the second.  A big reason was the turnaround in durable goods purchases which grew 6.3% in the second quarter compared to a slight contraction in the first.  Investment only increased 2%, thanks to a 6.8% decline in residential spending.  But nonresidential structural investment also fell from its first quarter reading of 14.8% to 4.9%.  Intellectual property investment was only up 1.4%.  But whatever the weakness of certain internal components, the 2.6% growth rate and a welcome change from yet another weak first quarter GDP reading.

            This week, we had reports on both new and existing home sales.  Let’s first look at new home sales:

These were up 0.8% M/M and 9.1% Y/Y (left chart).  This market has been in a solid uptrend since the summer of 2014.  New home builders clearly learned their lesson from the bubble; for the last four years, they have maintained a steady inventory relative to demand.  (right chart).

            Next, let’s look at existing home sales, which are by far the larger market:

Sales were down 1.8% M/M and up 0.7% Y/Y (left chart).  Sales have been between 5.5 million and 5.7 million units/year for the last year.  Part of the reason for the slowing sales pace is the constrained inventory situation (right chart).  Inventories relative to sales have been trending lower for the last four years. 

            Durable goods orders increased 6.5%. But the devil is really in the report’s details:

The top two graphs show total new durable goods orders (the absolute number is on the left; the Y/Y number is on the right).  The overall number could finally be moving through the $240 million dollar level that has contained this release for the last two years.  But the middle chart shows that core goods decreased slightly.  This sub-index – which is a barometer of business demand – is still fairly weak and today’ release did nothing to dispel that characterization.  The bottom chart illustrates that transportation orders are the primary reason for the increase.  This headline number will likely decrease in the next few months, bringing it back within the $220-$240 million-dollar range.

            Economic conclusion: this week’s news was very encouraging.  GDP rebounded to 2.6% largely thanks to an uptick in consumer activity.  Housing is growing modestly and durable goods orders ticked higher.  As of now, we’re on track for better growth in the third quarter.

            Market overview: earning season is well underway and results are positive. According to Factset.com, revenues are up 5.2% and earnings have risen 9.1%.  The same numbers for Zacks are 3.4% and 8.8%.  These results are fortunate because the market is expensive: the current and forward PE ratios for the SPYs and QQQs are 23.94/25.75 and 18.94/21.45, respectively.  Also remember that corporate profits are an important long leading indicator; these results point to continued growth in the next 6 to 12 months.

            This week’s market’s results highlight why I dislike the Dow.  While it was up 1.16% -- largely thanks to the disproportionate influence of several key stocks -- broader averages rose far more modestly.  The SPYs were up .01%, while the QQQs fell .19%; the IWMs were the big loser, dropping .59%.

            We are long past the easy money phase of this market.  Instead, investors should be content with modest gains:

The S&P 500 rallied strongly after the election.  Over a four-month period, the SPYs rose from a low of 205.26 to 238.12.  But since then, the index has been grinding higher in a “two steps forward one step back” manner.  This shouldn’t be surprising.  The post-election rally was fueled by the hope a unified Republican government would deliver lower taxes, regulatory reform, and more fiscal spending.  The market is slowly absorbing the bitter pill that this probably won’t happen as advertised.  But the economic environment is perhaps more important than the political, and that points to modest growth and -- thanks to a weaker dollar -- stronger exports.