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.

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.

There have been some negotiations:

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.

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.

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.

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.