Weekly Indicators for February 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Weakness is several coincident indicators has persisted, and this week spread to tax withholding, which has fallen off a cliff.

Housing permits and industrial production: a brief note

 - by New Deal democrat

I'll take a more detailed look next week once new home sales are reported, but for now a quick update on housing starts and permits.

This month it is pretty simple:  all three metrics I look at -- permits, single family permits, and the three month average of housing starts -- all made new record highs for the expansion.

This is an excellent report.

But haven't interest rates gone up to 4 year highs, you say?  If interest rates are the single biggest determinant in housing, why didn't permits go down?

A similar phenomenon happened after the "taper tantrum" of 2013, and also in the late 1960s as Boomers entered the market. In the first few months after interest rates started to rise, permits and starts rose strongly!  This is probably because potential buyers panicked and decided to "lock in" their purchases before they were priced out of the market.

So I expect several more months of strength, even if higher interest rates persist.  On the other hand, if they do persist, I expect a slowdown in the housing market by about late spring.

Turning to industrial production, I'm not particularly worried about January's decline.  In the first place, it was mainly oil, not manufacturing -- although manufacturing was flat:

Also, in the last few years January has seemed to be a particularly volatile month, due to the vagaries of winter weather.

On the other hand, in my "weekly indictors" column, I have noted the anomalous mixed or negative data from steel and rail (carloads, not intermodal) in the last month or so. While I don't think the coincident tail wags the leading dog, probably that weak weekly data should have provoked more notice as to its implications for production.

Bonddad blog's 10,000th post!

 - by New Deal democrat

According to Blogger, that last post about real retail sales was the 10,000th post on the Bonddad blog.

Thanks to all of our readers over the years! This isn't the biggest or most successful economics blog, but it does have an influential readership, which has been growing in the last year or two.

And now, let the nerdiness go onward!

A detailed update on real retail sales

 - by New Deal democrat

I consider real retail sales to be one of the most useful barometers of the health of the consumer economy, including the near term jobs outlook.

I haven't posted a detailed look at this metric for awhile.  I have a current update over at XE.com

Why I'm worried about the decline in real wages

 - by New Deal democrat

This is a follow-up to my post yesterday concerning the decline in real average and aggregate wages. Why should the data from just one month cause me to warn that "This is Bad?"

To show you, let's decompose the data into CPI and nominal aggregate wages, shown in the below two graphs, the first of which covers the inflationary era of the 1960s and 1970s, and the second covers the disinflationary era since:

In the year prior to at least 5 (arguably 6) of the last 7 recessions, BOTH nominal aggregate wage growth was decelerating (1980 and arguably 1969 being the exceptions) and consumer inflation was increasing (1980 and arguably 2007 being the exceptions). The 1981 recession was caused by the Fed very aggressively raising rates, and in the other two instances the pattern held, but with much less of a lead.

Note that a very good coincident marker for the onset of a recession, within about 3 months, has been the point at which the trends intersect. i.e., where YoY consumer inflation increases to the level of decelerating aggregate payrolls.

Note further that in the last 18 months YoY consumer inflation has generally been increasing. Meanwhile there are some slight signs of deceleration in aggregate payrolls, highlighted by this past month.

So now let's subtract YoY inflation from YoY aggregate payroll growth:

When the relative growth in payrolls decreases by 50% from its high (e.g., from 4% to 2%), that is a good marker for the onset of at very least a slowdown (e.g., 1966, 1984, 2016). EVERY SINGLE TIME the line has crossed zero it has indicated the onset of recession.

In the last 6 months, this line has been declining again, from 3% to 2%.

Since the inflation rate is more than anything determined by the price of gas, and I see no reason to expect a decline in that, and further we know that deceleration in YoY payrolls growth is a very regular feature of later expansions, so I see no reason for that to reverse (unless if for some reason the new leadership at the Fed decides to reduce interest rates).

So, there's nothing imminent, but I am seeing what looks like the beginning of the trend that will ultimately end in a recession, maybe in 18 to 24 months.  That's what has me concerned.

This is bad: real wages *declined* in January; may be rolling over

 - by New Deal democrat

Consumer prices rose +0.5% in January. That in itself isn't bad news, as they rose an equal +0.5% one year ago, so the YoY inflation rate remains at +2.1% (so if 2% really is a target rather than a ceiling, it should not give the Fed any cause for alarm).

But that much vaunted wage hike in the January jobs report has entirely disappeared, and not just for non-managerial workers, but for the average of all workers including managers. In fact in January real wages declined.

And the trend is a little worrying.

To begin with, real wages declined -0.3% for ordinary workers, and they are now down -0.8% from their July peak:

On a YoY basis, real wages are only up +0.3%:

Even worse, they are only up +0.1% from January 2016!

Note that even when we include managers, real wages fell in January, and are -0.5% below where they were in July:

Another metric that I think is very important is aggregate real payrolls for non-managerial workers.  This tells us how much money, in real terms, the middle and working class are earning.

After rising strongly in 2014 and 2015, it decelerated in 2016 and even more in 2017:

Note that, in the aggregate, real wages declined for the middle and working class in January, and they are back at the level they were 7 months ago.

On a YoY basis, real aggregate payrolls rose 2%:

This is undoubtedly why we have seen the personal saving rate decline over the last 6 months:

Also this morning, although Fred hasn't update the graphs yet, real retail sales declined -0.8%, putting that figure at a three month low. 

All in all, this is bad news, not just for the month, but in terms of a stalling trend that may even have rolled over, both in terms of worker wages, and possibly even in terms of real retail sales per capita, a long leading indicator of recession.

Memo to younger readers: in an era of rising interest rates, deficits DO matter very much

 - by New Deal democrat

If you are under about 45 years of age, the odds are that you agree with one statement made by Dick Cheney: that "Reagan proved that deficits don't matter."

As I mention from time to time, I am a fossil. I remember the "guns and butter" inflation of the late 1960s (Google is your friend) and the stagflationary 1970s.

Here is a graph of the interest yield on the 10 year bond from 1981 through 2013:

In an era of declining interest rates, deficits don't matter -- or at least very little.

Suppose the national debt runs up from $20 Trillion to $25 Trillion while at the same time interest rates decline from 4% to 3%. In that situation annual interest due on the debt goes from $800 Billion to $750 Billion -- an actual decline of $50 Billion a year. That can cover a multitude of sins.

Now here is a graph of the interest yield on the 10 year bond from 1961 through 1980:

In an era of increasing interest rates, deficits DO matter very much.

Suppose in that era the national debt runs up from $20 Trillion to $25 Trillion while at the same time interest rates rise from 3% to 4%. In that situation annual interest due on the debt goes from $600 Billion to $1 Trillion -- an increase of $400 Billion a year. That's $400 Billion that can't be spent on infrastructure or social or insurance programs.

Even if interest rates remain relatively stable as they have for the last five years:

Then the annual interest due in our example rises from $600 Billion to $750 Billion -- a deadweight loss of $150 Billion per year.

Now look at those three graphs again. I would say that the odds of a further decline in interest rates of any significance is close to zero. So the choices are whether interest rates over the next decade or two go sideways from here, or rise.

Since I am a fossil, I may not live to see it. But, dear reader, if you are 45 years old or younger, it is high time you disabuse yourself of the "wisdom" of Dick Cheney.

Interest rates: no shift in the economic weather yet

   - by New Deal democrat

I wanted to make two comments about what has been happening recently with interest rates, a short term look and a long term look.

Today let's discuss the short term.

Since September, long term Treasury interest rates have risen from roughly 2.1% to 2.8%. The two year Treasury yield has risen from roughly 1.3% to 2.1% -- which means that for the first time in years, the 2 year Treasury is giving you more in interest than the dividend yield from holding the S&P 500. So, not only will interest rates presumably slow the economy, in terms of income they are now a *relative* bargain compared with holding a wide index of stocks.

Now, I don't pretend to know where interest rates will go from here over the short term. Whether long rates rise over 3% or fall back under 2.5%, I don't know. But let's assume that over the short term they stay roughly where they are now.  

An upward spike in interest rates has happened twice in this expansion.  Most recently, rates spiked from under 1.5% in mid-2016 (thank you Brexit!) to 2.6% following the US presidential election (blue in the graph below).  Here's what happened with housing permits (red) and real GDP (green) in the year following that spike:

Permits stalled for most of 2017 before turning up, while GDP also paused before continuing to advance.

Next, in 2013 we had the "taper tantrum," during which long term interest rates rose from 1.6% to just over 3.0%, before fading to about 2.2% by the end of the next year. Short term rates stayed just above zero.  Here's the same graph showing what happened in 2014:

Permits slowed but never completely stalled, while real GDP did turn slightly negative in Q1 2014 before continuing to advance.

So far, interest rates have not broken out the type of range that led to brief slowdowns, but not a downturn, in the economy. 

The closest analogue, I suspect, is the late 1960s, where housing specifically and the economy gemerally were undergirded by the tailwind of demand from the burgeoning Boomer generation.  There, it took a 2% increase from 4.5% to nearly 6.5% in interest rates before housing, and then the economy, began to roll over:

So, unless rates rise above 3.25% at minimum, I suspect we are going to be OK in nearer term.