Saturday, December 23, 2017

Weekly Indicators for December 18 - 22 at

 - by New Deal democrat

My Weekly Indicators post is up at

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

Friday, December 22, 2017

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.

Thursday, December 21, 2017

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.

Wednesday, December 20, 2017

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

Five Key Graphs for 2018

This is up over at

Tuesday, December 19, 2017

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

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, December 18, 2017

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).