Weekly Indicators for September 1 - 5 at XE.com

 - by New Deal democrat

This week's post is up at XE.com.

Every now and then the nonfarm payrolls number just throws a spanner into the machine.  The weekly indicators don't suggest any slowdown has started at all.

A brief note about the Fed report on household wealth and income

 - by New Deal democrat

Yesterday the Fed released its report on 2013 household wealth and income.  The report only comes out once every three years, so the comparison is with 2010.

So far what I have read pretty accurately summarizes the report. But I want to add a few comments about items you probably won't read elsewhere, and some cautions about interpreting it.  I hope to have that up later today.

August jobs report: Jobs hit a speed bump

- by New Deal democrat

HEADLINES:

• 142,000 jobs added to the economy
• U3 unemployment rate declined from 6.2% to 6.1%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 45,000 to 6.304 million
• Employment/population ratio ages 25-54: up 0.2% from 76.6% to 76.8% (NEW POST-RECESSION HIGH)
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 (or +.3%) from $20.62 to $20.68, up 2.4% YoY

June was revised downward by -31,000 to 267,000. July was revised upward by 3,000 to 212,000.  The net revision was thus -28,000. 

Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for August show a little progress on wages, and mixed results on participation.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually risen for the first eight months of this year. As noted above they were 6.3 million in August.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

On the other hand, the participation rate in the prime working age group has made up 40% of its loss from its pre-recession high.

After inflation, real hourly wages for nonsupervisory employees probably increased from July to August. The YoY change in average hourly earnings is +2.4%, somewhat better than the inflation rate.

Finally, while the unemployment rate fell, it was because 64,000 people left the work force.  This only partially reverses last month's good number, with the net change in the civilian labor force over the last two months rose by 265,000, while the number of new jobs in the same two month period rose by 148,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed but with a positive bias.

• the average manufacturing workweek rose by +0.1 hours from 40.9 to 41.1.  This is one of the 10 components of the LEI, and will have a positive impact.


• construction jobs creased by 20,000. YoY construction jobs are up over 200,000, or about 4%.  This is good news.


• manufacturing jobs  were unchanged, and are up 168,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 13,000.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 22,000 to 2,609,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• The average workweek for all nonsupervisory workers was unchanged at 33.0 hours.


• Overtime hours was also unchanged at 3.4 hours.


• the index of aggregate hours worked in the economy grew by 0.1% from 108.7 to 108.8. 


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.2% to 12.0%.


• Part time jobs for economic reasons decreased by -234,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by only 16,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,189,000 increase in jobs YoY vs. 2,482,000 in the establishment survey. 


• Government jobs increased by 8,000.

• the overall employment to population ratio for all ages 16 and above was unchanged at 59.0% , and has risen by +0.4% YoY. The labor force participation rate fell from 62.9% to 62.8%, and has fallen by -0.4% YoY (but remember, this includes droves of retiring Boomers).

Relatively speaking, this was a poor report in comparison with the last 6 months.  But I wouldn't treat it as anything more than a speed bump. Most of the leading parts of the report were positive.  IN other words, this doesn't seem to herald a change in trend.

We did get a good number on wage growth, and we did get a good number on the prime age participation rate.  On the other hand, those who have dropped out of the labor force but would like to be employed remains signficiantly higher than it was at the end of last year.

No, Meteor Blades, household income does NOT measure the earnings of everyone in the household

 - by New Deal democrat

Real median income measures the INCOME of everyone in the household.

For example, if an 80 year old gets a pension payment, or interest payments on savings or bonds, that is included, even though it is not earnings. Since there are a lot more people over 55, and particularly over 65 now, as a percentage of the population, and they have lower income than prime working age households, real median household income has been in a secular decline.

That's why real median household income has mainly been telling us since 2000 that Boomers are leaving the work force,and now they are retiring in droves. Secondarily, it is a proxy for the employment to population ratio, as increased unemployment means lower income.

This may be the month unemployment finally falls below 6%

 - by New Deal democrat

I have a new post up at XE.com.

As you probably remember from past posts of mine, the ratio of initial jobless claims to the population is a pretty decent short leading indicator for the direction of the unemployment rate.

With July and August initial jobless claims in the vicinity of 300,000 and even less, we should finally cross to below the 6% threshold - i.e., a more "normal" unemployment rate - in the next several months.  Maybe even this Friday.

Weekly Indicators for August 25 - 29 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This was one of the most universally positive weeks I have ever seen. Only one series was negative and one neutral. Everything else was positive, several strongly so.

International Week In Review: Concerns Mounting For the EU and Japan

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/international-week-review-concern-mounting-about-eu-and-japan-edition

Problems Mount For the EU

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/problems-mount-eu

Comprehensive housing summary for July 2014: prices peak, but lower interest rates are putting an end to the sale slowdown

Wtih yesterday's report on pending home sales, housing data from the first 7 months of 2014 is in the books.  The data clearly shows that earlier this year was the trough of the housing slowdown, and that lower mortgage rates - down over .5% from the beginning of this year - are beginning to have a positive impact. At the same time, it appears that housing prices hit an interim peak earlier this summer, and are stabilizing if not in a slight decline.

I've seen some very poor analysis of the housing market, that I won't link to, in the last month.  For example, I've seen an argument, unsupported by actual data, that prices or even inventory, rather than interest rates, lead sales. This is demonstrably false if you simply look at the data.

You really need to remember the following.  The housing market tends to cycle in a regular order:

• 1st, interest rates turn
• 2nd, permits, starts, and sales turn
• 3rd, prices turn
• 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  July is when the turn in rates and prices became clear.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years through July:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates suggested that we would start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.  In July, in two of the three series, we did.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into outright  declines in the early part of this year.  New and existing home sales have been consistently negative YoY, and permits ended up at midyear only +2% in the first half of 2014 compared with the first half of 2013.

But with July's data, we can see that the trough of the housing slowdown is in place, and that there has been a significant positive turn in the last several months.  Only pending sales were negative YoY by -2.1%, although they were up month over month for the fifth month in a row.

In summary, through July 2014:

• Permits are down -0.9% from their October 2013 high, but up +12.6% from their January 2014 low
• Starts are down -1.1% from their November 2013 high, but up +21.9% from their Januay 2014 low
• New home sales are down -9.8% from their January 2013 high, but up +2.2% from their March 2014 low
• Existing home sales are down -4.3% from their July 2013 high, but up +12.2% from their March 2014 low
• Pending home sales are down -2.1% from their June 2013 high, but up +12.4% from their February 2014 low

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Even with the overall July increase, single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction.

Prices

 The Case Shiller 20 city index for July showed an actual decline from May and June.  By this important measure, prices have actually already made an interim peak:

Median prices for new homes (red) and existing homes (blue) are not seasonally adjusted, so I am showing their YoY% change, which shows continued marked deceleration in price gains.  Note that YoY comparisons lag seasonally adjusted month over month comparisons:

It is likely that we have seen an interim, seasonally adjusted price peak in housing.  It should decline for awhile before bottoming, as sales have already bottomed.

Inventory

With housing prices still increasing YoY, even if they are near or at or slightly past their seasonally adjusted peak, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.


In summary, through July 2014:

• 1. Lower interest rates have revived sales from their trough earlier this year. At the same time, because interest rates are still higher than they were several years ago, I am not expecting a renewed boom in sales.
• 2. As shown by the Case Shiller Index, prices hit an interim peak earlier this summer.  Because the lower interest rates are already feeding through the system, at this point I am expecting only a slight decline, or more generally a period of stable prices.

As I have noted a number of times in the last month, the biggest issue in the second half of this year is how much interest rates go down, and whether the decline is transitory or persists.  New housing sales are very important to the economy, and tend to feed through the entire economy over the course of a year or more.  For now, the trend is in the right direction.

2Q deflated corporate profits, real residential spending add to caution about 2015

- by New Deal democrat

I have a new post up at XE.com, discussing several important datapoints from this monring's revisions to second quarter GDP.

The remainder of 2014 still looks good, but there is at least one additional reason to remain cautious about 2015.

No matter how you measure, wages have stagnated

- by New Deal democrat

We have a variety of economic data series to track wages, including measures of average wages, median wages, and wages per unit production hour. There are at least 7 such measures.

In addition to the monthly average hourly pay report (listed first below), there are 4 quartely series:

• The most  commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full time workers each quarter. 
• The BLS also measures the Employment Cost Index quarterly.  
• The BLS also measures "business sector real compensation per hour" quarterly. 
• Another quarterly measure is unit labor costs, which measure how much labor gets paid per unit of output.

There are also two annual series:

• The BLS reports occupational employment statistics which are reported annually.  
• Additionally, the Social Security Administration measures annual net compensation from actual W-9 tax withholding forms, but this has only been issued through 2012.  This method means that the result is subject to change based on the total hours worked (remember that in the recession we lost 6% of jobs, but almost 10% of aggregate hours).  

Let's take a look at all of them.

The first graph, below, tracks monthly average (mean, not median) hourly wages (green), median wages from the employment cost index (red), and unit labor production costs (blue). All are adjusted for inflation using the CPI.  Since the quarterly index of median wages only started in Q1 2000, I have normed the indexes to 100 at that time:

As you can see, real average wages have risen fitfully, mainly reacting to the price of gas). Median real wages have essentially been flat for 10 years. This is certainly not what I would call good, given all the productivity gains during that same period. You need consumers to have the money to buy, before real growth in selling picks up as well.

Speaking of productivity gains, here are unit labor costs (i.e., how much labor does it cost to produce one widget) through the second quarter of 2014:

But since the price producers have charged for widgets has changed over time (in other words, is it really a labor gain if labor costs 2% more per widget, but the producer charges consumers 4% more per widget?), here are real unit labor costs adjusted by inflation:

This tells quite a different story.  The share of payments to labor has not kept up with the real price of production -- which is the flip side of record corporate profits.

The remaining 4 measures do not come with graphic presentations either by the BLS or the St. Louis FRED.  So I will provide them in a table, below.

Two of the remaining series uses tax return data.  Once a year, the Social Security Administration reports on the median salary of those who pay into it via their withholding taxes.  Secondly, every year the BLS reports on mean and median hourly wage rates for a panoplay of "occupational employment," and also give the average and the median for the aggregate sample. The most recent report, from this April,  reported on the data as of May 2013. The below table gives the median wage, adjusted by the CPI.

A third measure in the table below is the quarterly measure of "usual weekly earnings" of wage and salary workers. That report only goes back to 2004.

To reiterate, all of these are adjusted for inflation:

Year	Social Security		Usual weekly earnings	Occupational Employment
1999	27,164		---	---
2000	27,374		---	---
2001	27,713		---	16.78
2002	27,784		---	16.95
2003	27,657		---	16.91
2004	27,903		332	16.80
2005	27,331		333	16.71
2006	27,832		335	16.80
2007	27,984		345	16.70
2008	27,468		342	17.22
2009	27,584		337	17.12
2010	27,382		335	17.13
2011	26,963		337	16.86
2012	27,413		335	16.71
2013	---		333	16.63

 While two of the above 3 measues are annual, "usual weekly earnings" is updated quarterly, so here is a more detailed look at that measure through the second quarter of this year:

2013 Q1  332
2013 Q2  334
2013 Q3  333
2013 Q4  334
2014 Q1  336
2014 Q2  330

If you are keeping score, among the median measures, that's a decline from peak to trough is -3.6% for Social Security, -4.3% for usual weekly wages, -3.4% for Occupational employment, and -2.6% for the Employment Cost Index.  Average hourly wages declined - 2.6% from 2009 to their trough in 2012.  The big, nearly 2% decline in second quarter 2014 of usual weekly earnings is certainly surprising. Since it goes against all of the other monthly and quarterly series, I am inclined to think it is just a case of an outlier panel.  We'll see when 3rd quarter results are posted in October.

The bottom line is that, since the turn of the Millenium, real median wages - no matter how measured -  have stagnated. Gas prices caused them to rise during the recession, and then decline thereafter as the effects of those gas prices filtered through the economy. 

The jury is out on whether that decline has ended. Some measures suggest that real wages bottomed in late 2012 or early 2013.  Others suggest that the decline may have continued at least slightly since then.

No matter which measure you use, the fact is that American labor is still not sharing in the fruits of its productivity.

Draghi's Austerity Defense Rings Hollow

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/draghis-austerity-defense-rings-hollow

This Week's Germany News Has Been Concerning

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/weeks-news-germany-not-encouraging

A thought for Sunday: it is time for Judge Griesa to cease and desist

 - by New Deal democrat

It's Sunday, so I get to stray from posting economic data, and editorialize....

As most readers of this blog are probably aware, there is contentious litigation in the Southern District of New York Federal Court between several "vulture" funds, and the country of Argentina.  In a nutshell, when Argentina was forced to unwind its 1990s currency peg to the $US in 2001, it swapped old bonds for new bonds, but agreed to the jurisdiction of US courts in any litigation over the new bonds.  Over 90% of the old bondholders eventually went along, but some bondholders sold their rights to "vulture" funds which insisted on being paid in full.  In the ensuing US litigation, the US District Court in New York City agreed with the vulture funds.

The 83 year old senior judge handling the case, Judge Thomas Griesa, however, has gone well beyond making a legal ruling as to who owes whom how much.  He has issued injunctions ordering banks anywhere in the world  not to allow payments by Argentina on any debt unless it pays the vulture funds in full.

This egregious extra-territorial extension of claimed jurisdiction is bad enough, but if the following statement reported by Reuters  on Thursday is true, then in my opinion Griesa has finally stepped way over the line separating Judicial resolution of litigation, and the foreign policy of the United States:

"Griesa said proposed legislation announced on Tuesday by President Cristina Fernandez would violate orders he imposed favoring creditors who refused to accept restructured bonds following the country's 2002 default on $100 billion in debt.""It is illegal, and the court directs that it cannot be carried out," Griesa said at a hearing in New York."

I don't remember Judge Griesa being made the King of Argentina. Let's be clear here:  the new law passed by Argentina may violate the terms of its bond swap, and it may violate the orders of Judge Griesa in the US.  But for a US judge to be claim that a law passed by another country is illegal, and may not be obeyed, is a breathtaking usurpation of executive authority, and an imperial arrogation of Sovereignty over a foreign country.

To understand how outrageous this is, swap out Argentina for a country with more power.  Imagine a US judge Ordering that a law enacted by China, or Russia, or the EU, is "illegal" and may not be obeyed. To say that the blowback against the US would be significant would be an understatement.  The blunt truth is, the only reason Griesa can take this position is that Argentina doesn't have the military power to extract a price. Doesn't that sound like a decision that the Executive, not a low level judge, should be making?

I also don't buy that "Argentina" has made its bed, and now must sleep in it.  A corporation, faced with a similar issue, could simply wind up operations and its shareholder start a new corporation from scratch.  Countries can't do that.  And Argentina in 2015 is literally a different population from Argentina in the 1990s or 2001.  Demographically, its median age is 30, meaning an absolute majority of Argentinians were not of voting age in 2001, let along the 1990s, and about 15% of its population wasn't even born in 2001!  So the coercion being inflicted by Judge Griesa falls largely upon individuals who cannot bear any moral responsibility for the decisions made by former governments.

Judge Griesa has done quite enough damage already. He has now vastly overstepped the proper  authority of a US court, by effectively declaring himself the omnipotent Sovereign over another country.  It is time for him to cease and desist, or to be made to cease and desist by the Obama Administration.

International Round-Up

Over at XE.com

International Week in Review

International Preview for August 24-29

Weekly Indicators for August 18 - 22 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.  Summer is nearing its close and the data allows us to put our feet up, sip a libation, and enjoy the view.

The consumer fades further: real retail sales per capita for July

 - by New Deal democrat

With the release of the CPI the other day, I can update on of my new favorite economic measures, real retail sales per capita.  This takes the real, inflation adjusted sales number and adjusts it further by the number of consumers doing the buying. In the past, when the average individual consumer is puling back, it is an early (as in a year or more) signal of a downturn in  the economy:

This measure is slightly below its high from two months ago. I won't really be concerned unless it stays below its May peak for at least two more months.


Now let's look at it a second way, which is the YoY% change:

As I wrote last week in a post at XE.com, there has been a "slow fade" of the consumer since 2010.  July's real number continues that fade, although again I won't really be concerned unless the YoY measure turns negative and stays there for several months.

To put this in context of a number of indicators I continually study, there is a lot of evidence that the expansion is significantly past its halfway point (which ain't too bad after a 5 year expansion), but there is no imminent sign of any actual downtrun. My big fear remains the failure of wages to make any real progress in the last 15 years.

Prices of existing houses have probably made an interim peak

 - by New Deal democrat

I have a new post up at XE.com on this morning's report on existing home sales for July.

We have probably hit an interim peak for prices in the last two months.  More details in the article.

EU Weakness in Two Charts

This is over at XE.xom

We Might As Well Describe the EU's Economy As One in Permanent Recession

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/we-might-well-describe-eus-economy-one-permanent-recession