Saturday, May 25, 2019

Weekly Indicators for May 20 - 24 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The big contradiction between what the yield curve is forecasting, and what most of the rest of the long leading indicators are forecasting, continues.  Meanwhile Trump’s tariff  “policies” are creating chaos in other sectors.

As usual, clicking over and reading should not only bring you up to date, but helps reward me with a penny or two for my work.

Friday, May 24, 2019

Economic indicator death match update: either bonds or housing sales are giving a false signal

 - by New Deal democrat

Yesterday featured the week’s sole important economic release: new home sales. But first, let’s update the inverted bond yield curve, which got more dramatic yesterday. The below graph compares the depth of the inversion yesterday (bottom) with March of 2007 (top):

With the sole exception of the 2 vs. 10 year spread, the yield curve is virtually screaming oncoming recession at this point.

Now let’s turn to new home sales. As a refresher, new home sales are the most leading of any housing series, but they are extremely volatile and heavily revised. Yesterday they were reported down -6.9% m/m for April, but that wasn’t the important news, because March was revised higher to a new expansion high. As the below graph shows, only once in the past 50+ years have new home sales made their cycle low *before* the onset of recession - in 2000:

So, while it’s only one data series, just going by past history, yesterday’s report very likely negatives any recession in the near future, completely contradicting the bond yield curve.

Of course, mortgage applications, and new home sales, have rebounded this year because interest rates have fallen from a peak of close to 5% last November to 4.1% this week. So in the below two graphs, I show new home sales (blue) vs. mortgage rates (red, right scale) since the latter series was started in 1971:

Mortgage rates didn’t decline at all prior to the 1980 recession, and declined only trivially in the month before the onset of the 1970 and 1981 recessions. They declined more significantly — -0.6%, -1.7%, and -0.8% — before the onset of the 1991, 2001, and 2008 recessions. In the cases of both the 1991 and 2008 recessions, housing still declined in part due to oil price shocks and in 2008 the unwinding of leverage in housing and the mortgage markets. The 2001 recession, by contrast, was a producer-led downturn, as the dotcom bubble imploded, so the mild upturn in housing was not enough to overcome it. Housing did turn down *during* the 2001 recession, as people got laid off, but did not match its 2000 low.

Now here is an update of the same data for this expansion:

The bounce in new home sales in the past several months has been much stronger than that of 2000.

The big fundamental question in the economy right now is whether the upturn in housing will be enough to overcome the downturn in corporate profits for the past two quarters.  In short, one of these two powerful economic indicators is giving a false signal.

Thursday, May 23, 2019

Initial claims, temporary staffing point to weaker May jobs report

 - by New Deal democrat

As I’ve noted a few times recently, I’m paying additional attention to the weekly jobless claims numbers, partly because I suspected that the late Easter this year resulted in some residual seasonality (which I think has been demonstrated), and partly because if my slowdown forecast is correct, it ought to start showing up there.

The initial claims report this morning covered the week during which the BLS surveyed employers for the May jobs report coming out in two weeks. In the four weeks that coincided with the April report, initial claims made new 49 year lows, averaging 201,500. In the past five weeks that will coincide with the May report, the average has been 221,500.

So, while this isn’t precisely on point, here’s a graph of the four week moving average of claims (blue, left scale) vs. the unemployment rate (red, right scale):

I don’t think it was a coincidence that the unemployment rate fell to a 50 year low during the four week period that initial claims made 49 year lows. And I strongly suspect that the June report will take that back, with an unemployment rate of 3.8% +/-0.1%.

If that happens, it will be significant, because a 3.8% unemployment rate would be exactly what the rate was 12 months previously. And a YoY unemployment rate that has not improved has only happened once during this expansion (September 2016, right before the election).

Further, at the moment initial claims are higher YoY:

Even if they continue at the 210-212,000 range for the next few weeks, that’s still only about a 4% improvement from a year ago. 

Bottom line: unless jobless claims continue to fall in the weeks ahead, they are consistent with a slowdown.

And while I’m at it, another leading sector - temporary jobs - continues to show weakness as reported in the weekly American Staffing Association’s Index:

The four week average of the index is -2.9% YoY, the worst showing since the 2015-16 slowdown.

I was surprised by the strong +12,000 temporary jobs number in the April jobs report. I am expecting either that to get revised downward, or a poorer comparison when May’s report comes out, or both.

In short, the weekly data so far this month is consistent with an oncoming slowdown in employment gains. We’ll see in two weeks.

Wednesday, May 22, 2019

A comment about the economy and the 2020 election

 - by New Deal democrat

Recently I’ve seen a bunch of takes to the effect that “the economy is doing great, and therefore it is likely that Donald Trump will be re-elected.” In my opinion that fear is overblown for three important reasons.

The fist, least noteworthy reason, is that there is still a lot of time between now and the election. As I noted Monday, many - but not all - models of the economy indicate that a recession is likely between now and then, for reasons having nothing to do with the age of the expansion. Needless to say, a recession in 2020 would not bode well for either Trump or the GOP. 

Secondly, consider what economic interventions Trump and the GOP have made since they inherited the economy from Obama. There have been three: 

1. They passed a tax cut that lopsidedly favored the wealthy and corporations, that has generated zero acclaim from the middle and working classes - and with the decrease in tax refunds, may have generated net negative feelings. 
2. Trump has started several trade wars that are proving unpopular, partly because they mainly have hurt portions of his own base, partly because they are  resulting in net higher prices to consumers that may be getting noticed, and partly because negatively affected businesses may start laying off workers.
3. Trump is held responsible for the government shutdown that resulted in a mini-recession.

In short, it’s not clear to say the least that the public at large would give Trump credit for an economy that he mainly inherited from Obama and as to which his known interventions have been received negatively.

Finally, and most notably, the example of the Bush vs. Gore 2000 election strongly cuts against Trump. As I wrote in 2016, all of the fundamentals-based election models, such as the “bread and peace” model, or models based on the unemployment rate or on consumer income and spending, indicated that Gore should have won by nearly a landslide, on the order of 55%-45%, as shown in the graph below:

Instead, Gore won the popular vote by only 0.5%, despite being able to run on both peace and prosperity - the biggest outlier of the entire series going back to 1952. 

Two big factors held Gore back: first, the economic expansion had gone on for nearly 10 years, and at some point the public takes it for granted, or in other words, “so what have you done for me lately?” Second, as his Vice President, Gore was stained by Bill Clinton’s slimy personal life. 

Both of the factors that worked against Gore in 2000 are likely to work against Trump in 2020: if the economy remains in expansion, the public will probably take it for granted; and Trump’s pervasive sliminess, both public and private, will work against him. In short, Trump is likely to underperform compared with the fundamentals even more than did Gore.

While the example of 2016 certainly means that the 2020 election is another “all hands on deck” moment for Democrats, and nothing should be taken for granted, even if the economy remains in expansion as it is now I do not think that means Trump wins the election.

San Francisco Fed: ease of finding a new job is driving improved labor force participation

 - by New Deal democrat

This is a surprising result that is worth noting: the San Francisco Fed found that the increase in prime age labor force participation in the past five years has not been due to new people being drawn into the labor force, but rather by a very large decrease in people leaving it: 

[Note: keep in mind that prior to the early 1990s, both inflows and outflows are increasing due to the secular trend of women entering the workforce.]

Why is this surprising? Because you would think that increased wages would draw people on the sidelines into the workforce. This is something I’ve looked at a few times in the past several years, and the pattern has been clear:

1. The unemployment rate declines
2. Once the unemployment rate declines enough, the decline in labor force participation decelerates, but nevertheless continues.
3. Average hourly wage growth starts to improve.
4. Labor force participation starts to increase.

Here’s a graph showing this relationship since 1994:

The San Francisco Fed says that the reason for the big decline in outflows has been the ease of finding a new job, although that appears to be speculation. It might be that improved wage growth is something that is noticeable to people already in the labor force, rather than those presently outside of it.

Anyway, a counter-intuitive result worth noting.

Tuesday, May 21, 2019

Yes, Virginia, the government shutdown really did cause a mini-recession

 - by New Deal democrat

For the past several months, I have been pounding on the idea that the government shutdown, during which 800,000 jobholders were temporarily laid off without pay, had a much bigger impact on the economy than was originally thought.

This morning we get the following graph from Bank of America Merrill Lynch, which speaks for itself:

One of the most important insights from behavioral economics is that losses have an outsized effect on behavior compared to gains, usually on the order of 2 to 1. In the case of the government shutdown, about 0.5% of the workforce went without pay for about 45 days. Using the 2:1 ratio, that would translate into a -1% deadweight loss to the economy during that time. 

Of course, the workers got back pay when the government reopened - but if the 2:1 ratio holds, there wouldn’t be an equivalent “kick” from renewed spending. Which seems to have been the case, since the March +1.3% rebound in real retail sales didn’t make up for the -1.6% decline in December.

Monday, May 20, 2019

Twelve Big Picture bullet points on the economy

 - by New Deal democrat

It’s a really slow week for economic data. Really the only important report is new home sales, which will be released Thursday.

I’ve been working on a few things, but they are really information-dense and time-consuming to organize, and because they deal with how long leading indicators interact with one another, I’ll probably post them on Seeking Alpha.

So in the meantime, let me give you a few hopefully pithy Big Picture observations.

1. Virtually every economic model that relies upon the yield curve is forecasting recession to happen sometime in 2020.

2. The few economic models that don’t rely upon the yield curve suggest a recession *could* happen later this year.

3. If we use a “fundamentals” based model that doesn’t rely on financial conditions like interest rates (“real” corporate profits, housing, and cars), the important data is deteriorating, but not enough at this point to forecast recession vs. slowdown.

4. All of these models seem to have a shortcoming in that they rely too heavily on monetary and interest rate policy, and do not adequately account for fiscal policy, like stimulus. Thus all of them “forecast” a recession in 1966-67 that didn’t happen!

5. The reason no recession happened in 1966-67 was LBJ’s “guns and butter” fiscal policy of Vietnam War military spending + domestic Great Society spending, which increased the budget deficit by 500% (!) and helped keep industrial production from declining.

6. The stimulus passed by the Congress at the end of 2016 is much smaller, amounting to only a 50% increase in the deficit. It is also much smaller than either Reagan’s or W’s tax cut stimulus.

7. In any event, the stimulative effect is estimated to end by the end of this year.

8. Contrarily, Trump’s tariffs amount to large, regressive sales tax increases.

9. Which means that, if things don’t change, by next year fiscal policy will be a net drag on the economy.

10. The question remains whether the positive effect of lower mortgage rates can overcome that drag, and the drag of higher short term interest rates.

11. In the meantime, every metric I use indicates that job gains are set to decrease substantially starting more or less right now. The UCLA forecast puts this figure at about 160,000 a month for this year.

12. Needless to say, if a recession happens by the end of 2020, especially if Trump’s tariffs play an important role, fundamentals-based Presidential election models do not bode well for Trump or the GOP.

Sunday, May 19, 2019

Nancy Pelosi is an able tactician, but a poor strategist. She will not save the Republic

 - by New Deal democrat

A couple of years ago I read Andrew Roberts’ tome on Napoleon. As a schoolboy, Napoleon voraciously inhaled everything he could read about military conflict, including several then-recent books suggesting novel tactics. As a young general, he implemented those tactics to brilliant effect, winning almost every big battle he fought.

But if he was a masterful tactician, he was a so-so strategist. His strategy essentially consisted of:
1. Invade neighbor’s country.
2. Win all the big battles.
3. Occupy his capital.
4. Accept large indemnities, and territorial and political concessions, in return for going home.  

By the time he got to the last big continental power, Russia, Tsar Alexander and his generals had thoroughly analyzed Napoleon’s style. So they employed a colossal, masterful rope-a-dope strategy in which they retreated after every battle was started, denying him his decisive big victories while drawing him ever deeper into Russia’s heartland - ultimately 1000 miles. The tsar even allowed him to occupy Russia’s “old capital” of Moscow, and set it afire so that Napoleon could not use it to provision him during the winter. Then he simply ignored Napoleon’s entreaties to negotiate step #4. By the time Napoleon realized the tsar was simply going to refuse to capitulate, it was too late, and Napoleon lost over half a million men in the ensuing retreat through the brutal winter back to his nearest supply lines in Poland. Napoleon was fatally wounded, and Tsar Alexander’s men harried his retreat all the way back across Europe. Three years later, Russian troops occupied Paris.

Okay, so I’m not tarring Nancy Pelosi as making Napoleonic mistakes. But there is a comparison, because while Pelosi is a very able tactician, her excessive caution makes her a poor strategist.

Take the government shutdown. Common wisdom is, Pelosi won that battle. But look what was “accomplished:” in return for a government shutdown for about 45 days, with 800,000 federal workers furloughed without pay, causing an actual downturn in economic activity I’ve called a “mini-recession:”

here’s what Pelosi got. Instead of giving Trump $7 billion for his “wall,” she gave him $2 billion. Which by the way hasn’t been spent, and which caused him to declare a “state of emergency” which hasn’t even been passed on by a US District level Court yet. In other words, all of that for about 0.5% of the federal budget. In return for which, the President has so far gotten away with usurping a core area of Congressional responsibility.

Or, even more bluntly, a tactical victory but a strategic defeat.

Pelosi is playing the same tactical game when it comes to impeachment. According to the Chicago Tribune,
Pelosi has repeatedly warned that pursuing impeachment could hurt Democrats’ electoral chances in 2020.
 Instead, Democrats should focus on building their majority in the House and winning back the White House and a Senate majority in the 2020 election, Pelosi said. And where they can, Democrats should work with the Trump administration on policies, such as lowering prescription drug prices and investing in infrastructure, that will benefit the American people, she said.... 
“The urgency to protect the integrity of our democracy is there,” Pelosi said.The answer? “Just win big, baby,” the speaker said.
In other words, the answer to Donald Trump is a democratic victory in 2020 which will enable democrats to pass their agenda (how to deal with the Senate filibuster, assuming the democrats pick up 3 Senate seats, she doesn’t say).

Throughout her career, Pelosi has always accepted polls as gospel, and refused to see that action might *move* the polls. If the House were to impeach Trump, the publicity surrounding the hearings might create a bigger groundswell for conviction. And even if the Senate refused to convict, the groundwork would have been laid that actions such as Trump’s were unacceptable.

Instead, if Pelosi’s path is followed, in the meantime here’s what will have happened:

So, if Pelosi prevails, we will simply accept permanent damage to the US’s Constitutional fabric in return for the temporary ability to maybe get some things done in 2021. As someone else has pointed out, without Congressional action Mueller’s report reads like a blueprint for how to establish corrupt autocratic rule by, say, a President Tom Cotton. And, make no mistake, it will be followed.

Saturday, May 18, 2019

Weekly Indicators for May 13 - 17 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The stock market’s “tariff tantrum” is driving down interest rates in bonds. We are in a time when government policy decisions - sometimes just passing tweets - are driving winners and losers in economic activity. And these can have immediate impact, disrupting the scheme of long leading -> short leading -> coincident indicators of the economy.

As usual, clicking over and reading helps reward me a tiny little bit for my efforts.

Friday, May 17, 2019

Initial jobless claims lead the unemployment rate: May 2019 update

 - by New Deal democrat

Let’s take a look at a relationship I haven’t updated in awhile: initial jobless claims vs. the unemployment rate.

There used to be a site called “” that published a bunch of graphs, including one that showed that, measured on a 6 month rolling average basis, the change in initial jobless claims anticipated a similar move by the unemployment rate. Here’s one that I made use of about five years ago:

Certainly not perfect on a monthly basis, but over a longer timeframe, very persuasive.

Here’s what this looks like over the past 50+ years measured by their absolute levels:

Again, it’s pretty clear that initial claims does lead the unemployment rate by several months with some variability.

Here’s a close-up of that metric over the past five years (with initial claims averaged monthly for comparability):

Interestingly, in the past year, the unemployment rate has moved in tandem with claims without any appreciable delay.    

And here is the same data expressed as YoY% changes, first over the long term:

And now a close-up on the past six years:

Again, lots of noise in any single month’s comparison, but averaged over a longer period of time, the leading/lagging relationship is pretty clear, and it is also pretty clear that the trend in the YoY% change in initial claims has been rising (i.e., is less positive) since last September.

With  the exception of the three weeks right before Easter, initial claims have not declined significantly since February 2018. Leaving those aside, the biggest YoY% decline on a two week average basis was -3.5%. That suggests that the unemployment rate ought to be converging on about 3.8% (.965 x 4.0 = 3.86; .965 x 3.9 = 3.76).  In any event, since initial claims have risen significantly in the four weeks since Easter, I do not expect the 3.6% unemployment rate to last, although I am not expecting it to rise above 3.9% anytime soon.

Thursday, May 16, 2019

April housing permits and starts: not nearly so rosy under the headlines

 - by New Deal democrat

The headlines in this morning’s residential construction report were certainly positive:  permits increased by 0.6% and starts by 5.7% m/m.  I’ve been looking for a bottom in housing, based on lower mortgage rates, so this is good news because the bottom in overall permits and starts on a monthly basis may have been reached.  

But the news was not nearly so positive underneath.

As I have repeated many times, single family permits are my favorite metric, because permits lead starts, and single family permits are the least volatile of any of the measures. Well, single family permits sank to a two and half year low, at 782,000. This is -11.7% off their February 2018 high:

The least that single family permits have fallen prior to a recession in the past 50+ years was prior to the 2001 recession, at -12.5%, so we are very close to that threshold.

The saving grace in this number is that permits for multi-family dwellings have increased at the same time. This is socially beneficial, because these are more affordable for households unable to afford single family housing, which had become very unaffordable up until a few months ago. It also ameliorates some of the negative economic impact of the decline in single family construction. By contrast, just prior to the 2001 recession, multi-unit construction declined by -34% as well.

Next, housing starts are much more volatile than permits. And despite the great monthly improvement in starts, the three month moving average is also at a new 1+ year low:

Because starts represent actual economic activity, that this has continued to decline argues that the long leading effects of housing on the economy are going to continue to be negative for perhaps another year. And by the way, lest you think I am cherry-picking, the metrics above are the same ones I have been checking, month after month after month for years.

Finally, I’ve been watching construction employment as a leading sector of that metric. Employment has been the coincident indicator for the economy that has improved the most in the past half year.  In fact, all three of the other four big coincident indicators remain below their highs of last November or December:

In the past, residential construction employment (red in the graph below) has usually started to decline within 6 months after the peak in the number of housing units under construction (green), and coincident with the peak in housing units completed (blue):

The number of units under construction peaked 4 months ago in January, and has declined ever since. Completed units peaked two months ago in March. Residential construction employment declined in April.

So this morning’s housing report is powerful evidence that we should expect to see continued declines in residential construction employment in jobs reports going forward. 

Wednesday, May 15, 2019

April real retail sales turn negative, with both short and longer term implications

 - by New Deal democrat

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 April were down, -0.2%. Since consumer inflation increased by +0.3%, real retail sales fell by -0.5%, a poor result that nevertheless did not reverse the extremely strong March showing of +1.3% in real terms.  Last month I noted that sales were still slightly below their peak of five months prior, and YoY real sales remained in a downshift. Needless to say, April’s result did not help matters.  

Below are both the long term and short term graph of real retails sales:

Note that real retail sales turned flat for about a year before both of the last two recessions. Since late last year we’ve hit the biggest soft patch since 2013. In fact, we’re only up about +0.2% total in the past 11 months. As revised, both of these last made new highs five months ago in last November.

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. Normally I show this quarterly, but this time I’d like to show it in 6 month intervals, that really shows the leading relationship:

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

The lead times are somewhat variable, and notably most recently while sales roughed in mid-2016, employment did not similarly trough until a full 12 months later. We are currently 8 months into a big downshifting in YoY sales, so I still fully expect employment as measured in the monthly jobs report to slow down noticeably shortly. 

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:

Here is the close-up of the past 18 months:

Measured per capita, real retail sales peaked 6 months ago, and are down compared with 11 months ago. Unless there are substantial upward revisions, or a good report next month, this metric is going negative YoY.

Why is that significant?  Here are real retail sales per capita YoY, going all the way back to 1948: 

In the last 70 years, this measure has always turned negative at least shortly before a recession has begun. There are no false negatives. While there are about a dozen false positives for a single negative month, there are only four false positives for consecutive negative readings — 1966, 1995, 2002, and early 2006. Recently there has only been one month - last December - where this was negative YoY, so this series bears close watching to see if it turns negative again, and for longer than one month. 

To sum up, real retail sales for April weren’t just a weak coincident data point, bu they further point to weakness in the near term for employment gains, and are signaling negative for the long term depending on whether the poor readings remain durable for the next several months.

Tuesday, May 14, 2019

Consumer credit: both producer and consumer sides of the ledger show mortgage market OK, increasing stress for other loans

 - by New Deal democrat

The New York Fed reported on household debt and credit this morning.

The good news is that there has been no increase in total delinquencies:

This is important because the amount of delinquencies would be expected to increase if we were close to getting into a recession.

The somewhat more bad news is that, if the *amount* of delinquencies has not risen, the *percentage* of vehicle and credit card loans that are seriously delinquent has risen:

And the percent transitioning into  serious delinquencies for credit card loans have also risen:

Note, however, that mortgage loan delinquencies remain at their lowest ever in the survey.

Meanwhile, last week the Fed issued its Senior Loan Officer Survey, which covers the creditor side of the ledger. That report showed that in Q1, mortgage lending got slightly looser, as did credit to firms, while outside of mortgages, banks tightened conditions for issuing consumer credit, and consumer demand for nearly all types of credit declined. My post on the Senior Loan Officer Survey is up at Seeking Alpha.

In short, from both the producer and consumer side of the ledger, the mortgage market is in good shape, with some signs of increasing stress, and tightening of conditions, for other types of loans.

Monday, May 13, 2019

We are probably close (~500,000) to “full employment”

 - by New Deal democrat

From time to time over the past few years I have tried to estimate how far we were from “full employment,” by which I meant the average levels of the best year in each of the past two expansions. I also estimated how long it would take to get there given the then-current monthly gains in employment.

For example, two years ago I estimated that we needed to add another 2.5 million people, or 1.5% of the labor force, to the employment rolls in order to be at “full employment.” Last August, I updated the figure to a shortfall of about 0.8%, and estimated that, if employment trends held, we would get to “full employment” in about 9 to 12 months from then, which would be sometime between now and the end of summer.

Given the continuing very good jobs reports, I thought I’d take another look. 

First, here is the U6 underemployment rate. This includes, most importantly, involuntary part-time workers. For us to be at full employment, this figure ought to be at its 1999-2000 and 2006-07 levels:

We have already surpassed the latter, and are only about 0.2% away from the former.

On top of that, there are also people who aren’t even in the labor force, because they haven’t looked for work, but tell the Census Bureau that they do want a job now. In the below graph, I’ve divided that by the civilian labor force to tell us what percentage over and above the labor force fit in that category:

Currently these are equivalent to a little under 3.2% of the total labor force. At its best average levels in the last two expansions, this number was 3.0%, in other words, we are also about 0.2% away.

Put these two together and they add up to between 0.2% and 0.4% of the 170 million labor force, or in other words 340,000 to 680,000. If monthly employment gains continue to run about 100,000 over the number needed just to accommodate an increasing prime age population, that puts us about 7 months away. Meaning we should reach “full employment” by the end of this year.

This, by the way, has implications for wages, because the closer we approach to “full employment,” the more employers will have to raise wages to entice people who aren’t currently in the labor force to decide to enter it.
P.S. Yes I know it is more complicated than that. In particular people seem to come off disability rolls and find employment if it is plentiful enough at decent pay:

But at least some of that is probably reflected in the continuing elevated levels of underemployment and those who haven’t looked but have decided they now want a job. Also, I would expect that the prime age employment to population ratio will increase to over 80% as part of any further decrease in underemployment and job desirers who aren’t actively seeking employment.

Saturday, May 11, 2019

Weekly Indicators for May 6 - 10 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There was a classic “flight to quality” in long term bonds this past week, which drove their yields down.  Which is a good thing for mortgage applications and housing.

As usual, clicking over and reading helps put a couple extra pennies in my pocket.

P.S. If you read carefully, you can see where autocorrect did me dirty in the last paragraph of the conclusion!

Friday, May 10, 2019

Gas prices fail to ignite overall inflation in April, but real wages flat so far for 2019

 - by New Deal democrat
The consumer price index rose +0.3% in April, just as in March mainly as a result of a big monthly increase in gas prices. This is actually a surprisingly small increase because, as I pointed out last month, almost every time gas prices have increased by as much as they did — up 9% in March and 11% for April — consumer prices as a whole have gone up at least +0.4%. I’m showing just the last 10 years in the graph below (wages in blue, gas prices in red): 
Ex-gas, consumer inflation ex-energy has been remarkably stable between 1.5% and 2.5% YoY ever since gas prices made their long term bottom in early 1999. The only big exceptions were in the year before each of the last two recessions:

Now let’s turn to wages. Nominally, wages for non-supervisory employees increased +0.3% in April, so after inflation they were flat, as they have been all this year so far:

YoY non-supervisory wages nominally were up +3.4%. With YoY inflation rising to +2.0%, in real terms, real wages are only up +1.4%, a decline from their YoY high in February: 

In the long view, real wages are still -3.1% below their January 1973 peak, and -0.1% below where they were in February: 

Finally, here are aggregate real wages. This tells us how much more American workers as a whole in real terms since the bottom just after the Great Recession. These improved to 28.9% above their low, but only tied with their January peak: 

While in real terms American workers have made no progress so far this year, nevertheless it’s no surprise that in public opinion polls, Americans feel pretty good about the economy right now. Unemployment is lower than it has been in several decades. Underemployment is at least approaching its lows in the past 25 years. And wage growth, while subpar in historical terms, has improved to the point where it is not the kind of source of discontent it was in the first years of this expansion. I don’t expect this to change unless there is a further jump in gas prices, or else a significant tightening of consumer credit.

Thursday, May 9, 2019

Are initial jobless claims showing a re-assertion of an underlying weak economic trend?

 - by New Deal democrat

I don’t normally comment on initial jobless claims, but I’m following them with particular interest at this point. Here’s why.

Last spring the long leading indicators were still at least weakly positive. I saw growth ahead through Q1 of this year, and getting questionable in Q2. By last summer, the enough long leading indicators were down that I called for a slowdown in the economy by midsummer of this year - I.e., about 2-3 months from now.

And then ... Trump’s incipient trade war, the government shutdown (the equivalent of 800,000 layoffs without pay, followed by mass-rehiring with pay about 60 days later), and an ill-timed Fed rate hike immediately after a partial inversion of the yield curve, got together and caused a mini-recession in production, sales, and income. This mini-recession spanned 1 month in Q4 of last year and the first two months of Q1 this year. So the quarterly GDP numbers for both quarters looked good, but the monthly and weekly data deteriorated sharply. 

Once these distractions were over, most of the data rebounded. On top of that, Easter came very late this year, and it looks like there were some issues of unresolved seasonality. 

So, instead of smooth but slowly decelerating sailing, we got a sudden braking followed by a re-acceleration. So most of the non-permabear punditry nowadays is close to singing “Happy Days are Here Again!”

So, either I’ve been wrong - always a possibility! - or else the underlying decelerating trend ought to start reasserting itself by now. And one big place it ought to start re-asserting itself is - wait for it! - initial jobless claims.  Hence why I am paying particular attention to them.

Now that my lengthy introduction is over, let’s get to the data. First, here are weekly new jobless claims since late January of 2018:

Notice that, with the exception of the three weeks just before Easter this year, they have been in a 210k to 235k range. The three weeks just before Easter broke through the trend to the downside: 204k, 197k. And 193k. The three since then have been at the top end of the trend: 230k, 230k, and 228k.

Here is what the 4 week moving average looks like over the same period:

This helps show the trends: last summer’s mini-boom, the autumn and winter weakness,  the post-shutdown through Easter rebound, and then the last 3 weeks’ weakness.

So, to smooth out the remaining Easter seasonality, if you average the two weeks just before and just after Easter, you get 212,500. If you expand that to the three weeks before and after Easter, you get 213,667.

Now let’s look at the YoY% change in the 4 week moving average:


Notice that with the exception of the three week downward spike just before Easter, the recent YoY comparisons have been worse. The only comparable times were superstorm Sandy in 2012, the hurricanes of 2017, and briefly during the 2016 shallow Oil patch centered recession.

Unadjusted, the current 4 week average is 2.3% worse than one year ago. Averaging the four weeks around Easter makes it +0.5% worse. Averaging the current 6 weeks makes it -0.7% better. But whichever averaging we use, the YoY change is very weak compared with the last 9 years.

Before I go, let me cite two other items of data. The American Staffing Association’s Index of temp jobs deteriorated further on a YoY% basis this week:

Either this index has been wrong, or the strong temp jobs number in the April jobs report was an outlier.

Finally, the recent new records in the stock market have been another source of “Happy Days are Here Again!” But if you step back and take a longer term view:

It looks much more like the market has gone sideways in about a 10% range since January of last year. As of yesterday’s close, the S&P 500 was only 0.2% above the January 2018 peak.

In short - at least as of this week! - it looks like the underlying weak economic trend is re-asserting itself.

Wednesday, May 8, 2019

Economic indicator death match! The yield curve vs. mortgage rates

 - by New Deal democrat

This morning the 10 year vs. 3 month interest rate spread inverted again:

With the exception of the 30 year and spreads between 5 and 30 years, the entirety of the yield curve has inverted. And don’t forget, the intermediate term 2 year through 5 year spread has been inverted for nearly half a year!
Here’s a long-term view of the 10 year minus 3 month spread:

Here’s the thing: no matter which yield curve measure you choose, you still have to deal with the fact that it inverted in 1966 and 1998 (doesn’t show up in the above graph because it was only for a few days), and no recession followed within 24 months, although in the former case there was a substantial slowdown.
But since the inversion is because the 10 year has fallen so much, it is putting a bottom under the housing market. As of yesterday, mortgage rates have fallen back to 4.20%:

Mortgage applications are picking up again. This morning’s report shows them up 5% YoY. And that renewed housing activity should filter through into the wider economy by next year.
Bottom line: either the yield curve or the housing market are giving a false signal.