Thursday, July 18, 2019

Initial claims still weakly positive, most consistent with slowdown

 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.

Initial jobless claims last week were 216,000. This is average for the past 18 months. As of this week, the four week average is 8.6% above its recent low: 

and at 218,750, is only 250, or -0.1%, lower than this week last year: 

This remains positive.

Last July, initial claims averaged 215,250 (red). Through the first two weeks, it is 212,000 this year (blue), which is also positive:

So this too remains positive.

Finally, let’s compare the YoY% change in initial claims (blue) with continuing claims (red):

Comparisons have been  getting closer to crossing the threshold from lower to higher,  but this week moved lower to -3.8% YoY.  A longer term view shows that - so far - this is most consistent with the 1984, 1994, and 1996 slowdowns, and not a recession:

Wednesday, July 17, 2019

June residential construction report a decidedly mixed bag

 - by New Deal democrat

The Census Bureau’s report on residential construction for June was a decidedly mixed bag. Here’s their graph of permits, starts, and completions:

On the positive side, even though starts declined slightly in June, the three month average, which is the best way of looking at this measure due to its noisy m/m readings, improved to the best number in 13 months. Starts are real economic activity, and bode well for 2020.  Single family permits (not shown above) - the least noisy of all the leading housing indicators - also improved to 813,000, suggesting that April’s reading of 786,000 may have been their low.

On the negative side, total permits declined to 1.22 million annualized, which is the lowest reading in over 2 years, and is -13.2% below their March 2018 peak of 1.406 million. This is a bigger decline than that which preceded the 2001 recession. In other words, it is consistent with what might be seen in advance of a producer-led recession.

Additionally, total completions (green in the graph above) fell to a five month low. Since residential construction employment generally turns shortly after completions turn, this renewed decline in the past several months means that we can expect to see declines in this leading employment sector as well in the next several months.

As I said at the beginning, a very mixed bag. I’ll have a more detailed post up at Seeking Alpha probably tomorrow.

Tuesday, July 16, 2019

June consumption was strong, while production was weak

 - by New Deal democrat

This morning’s retail sales and industrial production releases for June are consistent with my take that the consumer sector of the economy is doing OK, while the production sector remains in trouble.

Let’s start with retail sales. 

Retail sales are one of my favorite indicators, because in real terms they can tell us so much about the present, near term forecast, and longer term forecast for the economy.

This morning retail sales for June were reported up +0.4%, while May was revised downward by -0.1%. Since consumer inflation increased by less than 0.1% last month, through the magic of rounding, real retail sales also rose +0.4%. The strength of the past two months means that YoY real retail sales are now up +1.7%.

Here is what the last five years look like:

Next, although the relationship is noisy, because real retail sales measured YoY tend to lead employment (red in the graph below) by a number of months, here is that relationship for the past 25 years, measured quarterly to cut down on noise:

Now here is the monthly close-up of the last five years. You can see that it is much noisier, but helps us pick out the turning points:

I still expect some softness in the employment reports in the next few months, but the renewed strength in real retail sales means that it may pass.

Finally, real retail sales per capita is a long leading indicator. In particular it has turned down a full year before either of the past two recessions:

As these made yet another new high in June, that is an argument against any actual downturn in the economy for the rest of this year.

But if the consumer side of the economy looks pretty good, the production side continued to lag in June, as industrial production as a whole was unchanged. Manufacturing production did increase +0.4%:

On the one hand, both may have bottomed in April, following the “mini-recession” brought on by the January government shutdown and some trade war fallout. On the other, both remain significantly below their expansion peaks set six months ago.

If an actual downturn is going to begin in the production sector, it will show up first in the new orders portions of the regional Fed indexes, the average of which has remained above zero so far.

Monday, July 15, 2019

The consumer vs. the producer economy

 - by New Deal democrat

Prof. Edward Leamer wrote over a decade ago that, in a consumer led recession, first housing turns, then vehicle sales, then other consumer goods.

What do home and vehicle sales tell us now about the economy, vs. corporate profits? This post is up at Seeking Alpha.

As usual, clicking over and reading puts a penny or two in my pocket.

Sunday, July 14, 2019

WARNING: another “debt ceiling debacle” is looming, and could cause nearly immediate recession

 - by New Deal democrat

It’s time to start to get seriously worried about another “debt ceiling debacle.” In 2011, the GOP refused to authorize a “clean” debt ceiling hike. The hike in the debt ceiling, for those who may not know, is necessary for the US government to pay debts that *it has already incurred.*

In 2011, as a result of the impasse, US creditworthiness was downgraded from AAA to AA. Consumer confidence plummeted:

Note the next largest spike downward occurred during the government shutdown at the beginning of this year.  
In both cases - the debt ceiling debacle and the government shutdown - Long bond rates (mortgages, shown in blue below) plunged in a “flight to safety,” and stock prices (red) also plunged about 15%:

We know, of course, that the stock market is not the “real” economy. In 2011, consumers nevertheless continued to spend (red in the graph below) and industry continued to expand (blue), but during the government shutdown at the beginning of this year, both went sideways or declined:

As I write this, it is almost certain that the economy is already in a slowdown. It is dicey enough that, although I see slowdown as the most likely scenario, I already am on “Recession Watch” for a possible downturn centered on Q4 of this year. Another knock like the “mini-recession” we had from December through February as the result of the government shutdown is the last thing we need.

But we may be about to get it. Congress is scheduled to go on recess after August 2, and not return until after Labor Day in September. According to various news organizations,

Treasury Secretary Steven Mnuchin put his request on paper for Congress to act on the debt ceiling before the August recess, writing to congressional leaders Friday that there’s a chance Treasury could run out of cash in early September.

Pelosi and Republican leaders are looking to strike a multi-year deal to lift the nation’s $22 trillion debt limit and nix Congress’ stiff spending caps, which threaten billions of dollars of cuts at year’s end.
“I am personally convinced that we should act on the caps and the debt ceiling,” Pelosi told reporters on Thursday evening, adding that it should be done “prior to recess.”

But here is a giant sticking point:

Meanwhile, Mitch McConnell, who may be evil but is nevertheless by far the shrewdest operator in Washington, is keeping his cards close to his vest:

[telling] a weekly leadership press conference that lawmakers wouldn’t let the United States default on its debt, but he didn’t offer a clear pathway to approving a debt ceiling increase.
“Time is running out, and if we’re going to avoid having either short- or long-term CR or either a short- or long-term debt ceiling increase, it’s time that we got serious on a bipartisan basis to try to work this out [...]” McConnell said. A CR, or continuing resolution, would fund the government at current spending levels.
Asked if Congress had to raise the debt ceiling before the August recess, McConnell sidestepped the question, saying lawmakers are in close contact with Mnuchin about the timeline but that he doesn’t “think there’s any chance that we’ll allow the country to default.”

Way back in 2011 I railed against Obama enabling the GOP’s debt brinksmanship, arguing that it only set a precedent for further blackmail. And here we are. 

But as cagey as McConnell may be, as we saw with the government shutdown, Trump is not only willing to hold hostages, but to execute some in order to try to get his way and please his base. All it will take is a few segments on Fox TV for him to once again blow up any deal McConnell brokers.

 There are three workweeks left until Congress’s summer recess. If for any reason we actually go over the brink this time, there is an excellent chance that the slowdown almost immediately tips into recession.

Saturday, July 13, 2019

Weekly Indicators for July 8 - 12 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Now that the Fed has all but assured a dovish stance going forward, the longer term forecast has become even more positive.

Friday, July 12, 2019

Real average and aggregate wages improved in June

- by New Deal democrat

Now that we have the June inflation reading, let’s finish out our week focusing on the labor market.

First of all, nominal average hourly wages in June increased +0.2%, while consumer prices increased +0.1%, meaning real average hourly wages for non-managerial personnel increased +0.1%. Together with upward revisions to prior months, this brings real wages up to 97.2% of their all time high in January 1973:

On a YoY basis, real average wages were up +1.6%:

On that score, this morning’s readings include this take by Prof. James Hamilton at Econbrowser indicating that the Phillips curve (the trade-off between inflation and employment) is still alive, together with this guest post by David Branchflower at Talking Points Memo on Jerome Powell’s acknowledgement that the Fed (and many others) failed to appreciate that we were not at full employment in 2016 as they began to raise rates, and stating that the evidence
shows that, now, wage growth is driven not by unemployment but by underemployment, which has still not returned to pre-recession levels. That explains the weak wage growth we see today, and why the U.S. is not yet at full employment.

This has been my point of view as well, and it gives me the opportunity to run a graph I haven’t updated in quite awhile - average hourly wages of non-managerial workers (minus 2.5% for easier observation] vs. the U6 underemployment rate [subtracted from 10% so that lower rates show as positives]. This shows that, following recent recessions, underemployment has had to fall below 10% before wage growth stops decelerating:

Last month I raised a concern that real aggregate wages had decelerated sharply this year, writing that “[w]hen we take the information in the above graph and chart the YoY% change, we see that real aggregate wage growth has typically decelerated by 1/2 or more from its 12 month peak just at the onset of recessions, although there have been 3 false positives coincident with slowdowns.” Well, with June’s revisions that concern has disappeared for now:

Finally, with the improvement in June, real aggregate wages - the total amount of real pay taken home by the middle and working classes - are up 29.2% from their October 2009 low:

For total wage growth, this expansion is solidly in third place, but behind the 1960s and 1990s, among all post-World War 2 expansions; while the *pace* of wage growth has been the slowest except for the 2000s expansion.

Thursday, July 11, 2019

Initial claims positive to start July, but trend in continuing claims the weakest in 9 years

 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.

Initial jobless claims last week were 209,000. This is in the lower part of its range for the past 18 months. As of this week, the four week average is 9.2% above its recent low, and at 219,250, is 1,500 lower than this week last year: 

This remains positive.

Last July, initial claims averaged 215,250. Obviously, 209.000 (blue in the graph below) is below that average, which is also positive - but is only the first of the four weeks that will go into that average (red):

So this too remains positive.

Finally, let’s compare the YoY% change in initial claims (blue) with continuing claims (red):

We see that the comparisons are getting closer to crossing the threshold from lower to higher, and that the YoY change in continuing claims in particular is the weakest it has been during this entire expansion - but they haven’t crossed the threshold yet.

Wednesday, July 10, 2019

Using long term unemployment claims as confirmation for initial claims

 - by New Deal democrat

In the last few months, I’ve been paying extra attention to the weekly reports of initial jobless claims. Today I want to compare them to long-term claims (15 weeks or over) for unemployment benefits.

Way back about a decade ago, one of the occasional co-bloggers here was Invictus, who personally knew and subsequently was scooped up by Barry Ritholtz. Well, he still writes, and his Twitter feed is worth checking out. 

So anyway, last week he tweeted this:

It had been a long time since I checked this series, so I wanted to double-check the claim that it always turned up before a recession. The answer is, usually that has been true, but it made its expansion low in the exact month that a recession started three times (1948, 1953, and 1981), and made its low one month after a recession had already started once (1960).

Also, my recollection was that short term unemployment turned up first (0 to 5 weeks), then intermediate term (5 to 14 weeks), before longer term 15+ weeks turned up. That is still correct, but the drawback is that short term claims are much noisier and unreliable compared with long term claims:

Here is the YoY% change perspective (divided into two time periods), which better shows that short term unemployment leads long term unemployment — but is too noisy to be of much use:

But of course, we don’t have to rely on the monthly unemployment numbers when we have weekly initial claims. As the graph below shows, these *also* lead long term claims, but are much less noisy than the monthly short term unemployment number (note I have averaged initial claims monthly to cut down further on noise in the below two graphs):

The leading/lagging relationship is easy to see when we graph the YoY% change in the two series:

One of the two ways I measure signal in initial claims is if they turn higher YoY on a monthly basis, but there are some false positives. It turns out, when we add long term claims as a confirmatory signal, we only get two false positives, in 1985 and 1996, for only one month each. That’s five accurate signals to two false ones. If we insist on two months in a row, there are no false positives — although as set forth above, there are two false negatives since 1960 in the sense that you don’t get the signal until the month the recession starts or one month later.

Still, using long term unemployment claims as a confirmatory signal looks very useful in terms of adding to the reliability of the forecast.  And speaking of initial claims, their monthly average between July and September was between 212,000 and 215,250 - so the likelihood that they will send a negative signal in the next several months looks high.

Tuesday, July 9, 2019

May JOLTS report is weak, consistent with last month’s weak jobs report

 - by New Deal democrat

The jobs report one month ago was poor, so as expected the JOLTS report for May, released this morning, followed suit.

To review, because this series is only 20 years old, we only have one full business cycle to compare. During the 2000s expansion:

  • Hires peaked first, from December 2004 through September 2005
  • Quits peaked next, in September 2005
  • Layoffs and Discharges peaked next, from October 2005 through September 2006
  • Openings peaked last, in April 2007 
as shown in the below graph (normed to 100 as of May 2018):

As shown above, in today’s report, all of the above series, as well as job openings, declined month over month. Additionally, the only series that were higher compared with one year ago were job openings (+2.8% but significantly off its November 2018 high) and quits (+2.5%)

Next, here is the history of the “hiring leads firing” (actually, total separations) metric, measured quarterly to cut down on noise):

And here is the monthly measure for the last five years (plus job openings in blue):

As you can see, both hires and fires have essentially gone sideways for the last twelve months. It is possible both are at a turning point, but it is impossible to know.

Only layoffs and discharges have shown an improving trend over the last year, and ticked lower in May, although they are off their best readings:

To sum up, job openings have declined about -4% from their peak six months ago. Hires, quits, and total separations have been rangebound, with the only improvement in layoffs and discharges. 

While the absolute levels are solid, this month’s report, just like last month’s jobs report, does not show an improving jobs market. But since the June jobs report was strong, we can expect the JOLTS report next month to be stronger as well.

Monday, July 8, 2019

Scenes from the June employment report

 - by New Deal democrat

As I (and everyone else) wrote on Friday, the establishment portion of the June jobs report was very good.

On closer examination, though, the leading components of the report continued to show some weakness.

To begin with, for months I’ve been following manufacturing, residential construction, and temporary employment as the leading sectors. As the below graph of the past 18 months shows, all were positive in June:

But if you compare each bar (blue, red, green), you see that two of the three sectors nevertheless came in considerably lower for June with the average in that sector from 2018 (17k vs. 21K, 4.6k vs. 4.3k, 4.3k vs. 6k, respectively).

More broadly, jobs in goods producting industries turn down in advance of recessions much more sharply than those in service producing sectors:

There has been a significant turn-down in goods producing jobs in the past six months, although it is consistent with a slowdown only at this point.

Finally, I’ve been watching initial jobless claims as a leader for the unemployment rate. Here’s what that update looks like through June (note jobless claims are averaged monthly):

Initial jobless claims have trended essentially sideways, averaging between 212,000 and 225,000 over the past 17 months. Meanwhile the unemployment rate has trended slightly downward. If initial claims continue to trend sideways, I expect the unemployment rate to stagnate as well. Note also that initial claims will have very difficult YoY comparisons for the next four months. If they trend higher YoY, that is a cautionary signal consistent with a possible recession shortly thereafter.

Saturday, July 6, 2019

Weekly Indicators for July 1 - 5 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha. Lower long term interest rates continue to improve the long range forecast, while the short term forecast has deteriorated.

As usual, clicking over and reading puts a penny or two in my pocket to help reward me for my efforts.

Friday, July 5, 2019

June jobs report: excellent establishment survey, mediocre household survey

 - by New Deal democrat

  • +224,000 jobs added
  • U3 unemployment rate rose 0.1% from 3.6% to 3.7%
  • U6 underemployment rate rose 0.1% from 7.1% to 7.2% 

Leading employment indicators of a slowdown or recession

I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were all positive this month.
  • the average manufacturing workweek rose 0.1 from 40.6 hours to 40.7 hours. This is one of the 10 components of the LEI. 
  • Manufacturing jobs rose by 17,000. YoY manufacturing is up 167,000, a deceleration from last summer’s pace.
  • construction jobs rose by 21,000. YoY construction jobs are up 204,000, also a deceleration from last summer. Residential construction jobs, which are even more leading, rose by 4600, the first monthly decline in the past three.
  • temporary jobs rose by 4300.
  • the number of people unemployed for 5 weeks or less declined by -186,000 from 2,147,000 to 1,961,000. The post-recession low was two months ago.

Wages and participation rates

Here are the headlines on wages and the broader measures of underemployment:
  • Not in Labor Force, but Want a Job Now: rose by 227,000 from 5.045 million to 5.322 million
  • Part time for economic reasons: declined by -8,000 from 4.355 million to 4.347 million
  • Employment/population ratio ages 25-54: unchanged at 79.7%. This remains a declined from the peak at the beginning of this year.
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.04 from  $23.39 to $23.43, up +3.3% YoY. This is still a slight decline from the recent YoY% change peak.  (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 an average of +14,000/month in the past year vs. the last seven years of Obama's presidency in which an average of +10,300 manufacturing jobs were added each month.   
  • Coal mining jobs were unchanged, an average of -100/month in the past year vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
April was revised downward by -8,000. May was also revised downward by -3,000, for a net change of -11,000.

Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime was unchanged at 3.4  hours.
  • Professional and business employment (generally higher-paying jobs) rose by 51,000 and  is up +1,482,000 YoY. 
  • the index of aggregate hours worked for non-managerial workers rose by 0.2%
  •  the index of aggregate payrolls for non-managerial workers rose by 0.5%  
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey rose by 247,000  jobs.  This represents an increase of 1,413,000 jobs YoY vs. 2,301,000 in the establishment survey. This survey, which has been negative three months this year, was a major disconnect from the establishment number. The household survey has a tendency to turn first, and this month it showed up in the establishment survey.
  • Government jobs rose by 33,000.
  • the overall employment to population ratio for all ages 16 and up was unchanged at 60.6% m/m and is up 0.2% YoY.          
  • The labor force participation rate rose 0.1% from  62.8% to 62.9% m/m and is unchanged YoY.


Once again there is a divergence between the establishment report, which was excellent, and the household report, which was mediocre.

The best news was that all of the leading measures in the report were positive, taking back last month’s declines. Good professional and business jobs and government jobs rose strongly. Aggregate hours and payrolls also rose nicely. The only negative in the establishment survey was that revisions continued to be negative, which is thought to be something that happens at negative turning points.

While the monthly increase in jobs in the household report was also strongly positive, the YoY change continues to be lackluster, averaging about 125,000 jobs a month. Again, this is thought to be the kind of divergence that happens at negative turning points. Both the unemployment and underemployment rates rose. The participation’s rates and employment to population ratios were either flat monthly or flat YoY.

So, bottom line, this was mainly a very good report. Whether it signals that recent weakness was overblown, or whether it itself was a countertrend number, we will find out in the next month or two.

Wednesday, July 3, 2019

Initial claims on the cusp of turning neutral; expect a middling June jobs report

 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update, plus implications for the impending June jobs report.

As of this week, the four week average is now 10.3% above its recent low:

Last June the monthly average was 222,000. This year it was 221,500:

That is merely -0.2% better than last year. In other words, had this week’s number been just 1,000 higher,that would have been enough to tip this indicator from positive to neutral.
 Now let’s turn to implications for Friday’s jobs report. Since initial jobless claims lead the unemployment rate, here is the long term view of both as YoY% changes going back 50 years:  
Now here is the close-up on the past 8 years:

As you can see, there is no monthly correspondence, but there is a clear leading relationship. In both May and June, initial claims were barely below where they had been in May and June 2018.  The corresponding unemployment rates were 3.8% and 4.0%, respectively. As a result, I am anticipating that the unemployment rate will rise to the 3.7% to 3.9% range.
Another leading employment sector is residential construction employment. As the below graph shows, it follows residential construction spending on a YoY% basis:  
Residential construction employment declined last month, and it is most likely that it will show another decline this month.
Additionally, the leading sector of manufacturing employment tends to follow the ISM manufacturing index with a lag of 3 to 9 months. Although FRED no long er carries the ISM data, it fell below 50 in both 2011 and 2015. As the below graph shows, manufacturing employment subsequently underwent monthly declines as well:  
Thus I am expecting another lackluster month for this sector.

Finally, here is the YoY graph from the American Staffing Association of temporary employment:
This has stopped deteriorating on a YoY basis, and has made a little bit of improvement. Thus I expect a weakly positive number for this sector.
Keep in mind that there is, as I said above, no simple month-to-month correspondence in these numbers, although on a longer term time frame it is clear.
But put together initial claims, residential construction, ISM manufacturing, and temporary staffing, and this suggests to me a middling type of number, probably between 120,000 and 160,000. 
We’ll see Friday.

Tuesday, July 2, 2019

In which I nitpick Prof. Jared Bernstein about a consumer “economic tailwind”

 - by New Deal democrat

Last Friday, following the release of May’s personal income and spending report, Prof. Jared Bernstein, whom I follow religiously, wrote among other things about some economic headwinds and tailwinds, including the following: 

Finally, my personal favorite tailwind indicator [pointing to the below graph]: the close tracking between aggregate real earnings and consumer spending. The good news is they’re both clearly in expansion territory. The bad news is that they can both downshift within a few quarters:

Although he labels them differently, the first is one of my favorites as well: real aggregate payrolls of production and non-supervisory employees. The second is real personal consumption expenditures. 

That piqued my interest, because over seven years ago I wrote that

real retail sales are much more volatile [than personal consumption expenditures]. And, . . .  in a very specific and non-random way
early in economic expansions, YoY real retail sales growth far outstrips YoY PCE growth. As the economy wanes into contraction, YoY real retail sales grow less and ultimately contract more than YoY PCE's. You can see that by noting that retail sales minus PCE's are always negative BEFORE the economy ever tips into recession [graph omitted]. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession.

So normal is this pattern that it is one of my “mid-cycle indicators.” 

Okay, to the nitpick....

Prof. Bernstein’s post suggests that real personal consumption expenditures and real aggregate wages are coincident to one another. Since both are OK now, that’s a significant tailwind.

But what happens when we substitute real retail sales?

Let’s start with real personal consumption expenditures and real retail sales, going back 60 years (averaged quarterly to cut down on noise):

This graph confirms that (1) real retail sales more often than not slightly lead real personal consumption expenditures, and (2) real retail sales are much more volatile, especially to the downside, meaning they especially lead in the months leading up to a recession. Hence the “non-random way” in which the two measures differ.

Here’s the monthly comparison over the past five years:

After a resurgence following the 2017 hurricanes, YoY growth in real retail sales has fallen well below that of real personal consumption expenditures, including one negative month during the government shutdown “mini-recession.”

So, now let’s compare real aggregate payrolls to real retail sales. Here’s the long term look going back 55 years to the start of the series:

And here is the past 15 years (the same time frame as Prof. Bernstein’s graph):

With the exception of 1980, real retail sales have always improved first coming out of recessions. Further, more often than not (1969, 1981, 2000, 2007) real retail sales have also led real aggregate payrolls heading into recessions.

As shown in the last graph above, so far this year looks a lot like 2006. That doesn’t mean there can’t be a bounce, but what it does suggest is that consumer behavior isn’t nearly as much of a tailwind as Prof. Bernstein’s statement would make it appear.

Monday, July 1, 2019

As we start the second half of 2019 . . . (Updated: manufacturing almost exactly flat in June)

 - by New Deal democrat

First of all, I forgot to post a link to my post at Seeking Alpha on how a near-term recession is not likely to be centered on either the consumer and financial sectors of the economy, which are doing OK at the moment, but the producer sector - manufacturing - which is getting pretty shaky. We’ll find out more later this morning when ISM manufacturing for June gets reported.

As usual, clicking over and reading puts a penny or two in my pocket to reward me for my efforts.

Now that we are in the second half of the year, I expect the slowdown that we’ve seen over the past few months to become more entrenched. I remain on “recession watch” because risks are elevated (see, for example, this post by Menzie Chinn), but despite the inverted yield curve, my base case remains slowdown only because the Fed can lower rates substantially without being worried about inflation. The main wild card is that Trump probably simply cannot control his urge to roil producers with chaotic tariff and trade policies.

UPDATE: The ISM manufacturing index remained slightly positive in June, at 51.7. The leading new orders subindex was precisely flat, at 50.0:

There is no manufacturing recession. There is the barest of manufacturing expansion.

Sunday, June 30, 2019

On Gerrymandering: “The United States shall guarantee to every State in this Union a Republican Form of Government”

Previously I have written that the Fourteenth Amendment specifically provides for a reduction in representation for any state that engages in voter suppression.

Section Two of the Fourteenth Amendment provides in part:

“[W]hen the right to vote at any election ... is denied to any ... citizens of the United States, or in any way abridged, except for participation in rebellion, or other crime, the basis of representation therein shall be reduced in the proportion [thereto]....”

In view of the GOP Supreme Court majority deciding that partisan gerrymandering is a “political question” beyond the purview of the courts, I want to take this matter further. Because if the Congress is willing to play hardball, it has a remedy.

Article 4, Section 4 of the US Constitution provides:

“The United States shall guarantee to every State in this Union a Republican Form of Government.” 

Importantly, ILuther v. Borden (1849), the Supreme Court established the doctrine that questions arising under this section are political, not judicial, in character and that “it rests with Congress to decide what government is the established one in a State . . . as well as its republican character.”

In other words, it has already been established that what the guarantee of a “republican form of government is” is not for the Federal Courts, but for the Congress and the President to determine.

Do States have a “republican form of government” if a minority of the people are able to entrench themselves as a permanent legislative majority based on the outcome of just one election? Now that the Supreme Court has said that the Courts may not act, I think Congress has every right to declare that this is the case, both at the state and federal election levels, and to refuse to seat anybody winning such elections.

Here’s how I envision it could work. Congress would pass a “Republican Form of Government” law, whereby Congress could examine the State and Congressional districts of any State to determine if there was a partisan gerrymander that was an “abridgment” of the right to vote under Section 2 of the Fourteenth Amendment, and that if Congress so found, then it could determine that any such State was not permitting a “republican form of government.” Relying upon that finding, Congress could refuse to seat more than the proportional number of gerrymandered winners, or order new state elections in districts that were not gerrymandered. It would not have to wait for actual election results. It could notify the State in advance of the penalty if the State proceeds with such gerrymandered districts. Remember, since we now have Supreme Court precedent that “republican form of government” questions are political issues, as are matters of partisan gerrymandering, the door to this kind of Congressional action is wide open.

Such a law would also be in accordance with Article I, Section 5 of the United States Constitution which states that:

"Each House shall be the judge of the elections, returns and qualifications of its own  members...." 

This had been interpreted that members of the House of Representatives and of the Senate can refuse to recognize the election or appointment of a new representative or senator for any reason. It is particularly instructive that these issues arose often after the Civil War, as southern States sent Representatives where newly freed slaves were not allowed to vote. Even before the Fifteenth Amendment, the second section of the Fourteenth Amendment I have discussed was enacted as a remedy.

In my previous article, I used the example of North Carolina, where over 50% of the votes cast in 2018 were for Democrats, but Democrats were only elected in only 3 of the state’s 13 Congressional Districts. If North Carolina persisted in this gerrymander, then under a “Republican Form of Government” law, Congress could refuse to seat more than 3 GOP election winners. Congress could also similarly act on state legislative seats, or refuse to accept the North Carolina legislature as elected, as legitimate.

I realize this is a radical suggestion, but not to play hardball at this point is to accept that a minority may entrench itself in power forever without remedy. The GOP has been playing hardball for decades. It’s time for us to fight back.

Saturday, June 29, 2019

Weekly Indicators for June 24 - 28 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Not a lot of movement in any individual indicators, but manufacturing in particular moved very close to a downgrade.

Friday, June 28, 2019

The consumer is alright

 - by New Deal democrat

One of my big themes this year is that low gas prices can hide a multitude of economic sins. This morning’s data on personal income and spending confirms that the consumer side of the economic ledger is doing OK.
Nominal personal income rose +0.4%, and nominal personal spending rose +0.5%. After adjusting for inflation, the numbers are +0.3% and +0.2%, respectively. As a result, the positive trends for both continue:

On a YoY basis, we can see that spending slightly leads income (similarly point to the way consumption leads employment, not the other way around), and is also more volatile:

Next, going back 50 years, real retail sales improve further early in expansions, and fade more quickly later in expansions. Here’s the graph for that for the past 20 years:

The trend reversed for 12 months after the August and September 2017 hurricanes sparked lots of extra spending, but not the late cycle pattern has re-asserted itself.

What isn’t spent is saved, and the personal savings rate adjusted for inflation generally declines substantially roughly midway through expansions, and then starts to turn up just before or early during recessions as consumers get more cautious:

The former has happened. The latter really hasn’t, although it did briefly spike during the “mini-recession” caused by the government shutdown.

Finally, real personal income minus government transfer payments (e.g., food stamps) is one of the metrics the NBER uses to delineate recessions. Here’s what that looks like for the past 20 years:

Again, this is still positive, although for the last 9 months there has been a significant deceleration to +1.0% (or +1.3% annualized).
So, to sum up, as to the consumer side of the economic ledger:
1. Lots of evidence of late cycle deceleration, but
2. No sign of rolling over at this point.
With low gas prices and somnolent inflation, 3%+ YoY wage gains are enough for the consumer to be doing alright. If there is a recession waiting in the wings, it will be producer-led similar to the dotcom bust of 2001.