Weekly Indicators for June 15 - 19 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.  Some of the bad news appears to be abating, while there a new, both positive and negative, crosscurrents.

International Economic Week in Review

This is over at XE.com

The Fed vs. Millenials: inflation and the apartment boom

 - by New Deal democrat

Should the Fed raise rates when inflation is being driven exclusively by a necessity, and demand for that necessity is being driven by demographics?

Just as with Boomers 50 years ago, the Millennials have reached the age where they are moving into their first residences.  This has created a boom in multi-unit dwellings:

 and has driven median asking rents to record inflation-adjusted highs.

At the same time, the CPI less shelter is the most negative it has been in 60 years (-1.3%) excluding the bottoms of the 1950 and 2009 recessions.  In other words, the only important driver of inflation right now is Owner's Equivalent Rent, as shown in this graph comparing CPI for housing (red) with CPI for everything else (blue):

Notice what happened from the late 1960s through the early 1980s as the Boomer generation reached initial apartment/home buying age. The same contrast is appearing now.

Last I checked, shelter is a necessity.  So we have this huge demographic creating an increasing demand for shelter, which is driving up prices and construction, to alleviate the shortage.

If the Fed raises rates, all they are doing is making the shortage more acute (because shelter is a necessity and ultimately the demand must be filled), and hurting Millennials in the process.  Further, all that does is set the stage for even more inflation for shelter later on in the next recovery, just as it did in the 1970s.

In my opinion the Fed should relax its inflation target, specifically as to shelter, to accommodate this secular demographic need. As to everything else, at the moment inflation is a dead as the fabled parrot in the Monty Python sketch.

The shallow industrial recession continues - but no signal for general growth

 - by New Deal democrat

Several days ago May industrial production showed another decline.  The consensus in the commentary was that this was due to continued weakness in the Oil patch and strength in the dollar.  I agree.   James Picerno also had a nice, lengthy article explaining why this ongoing decline isn't enough to be a recessionary red flag.  I agree with that too.

But it is worthwhile to show why Picerno, and the consensus, are correct, by comparing the various sectors of production, and comparing the current weakness in production with past episodes of weakness.

First, let's look at the sectors that make up the industrial production report.  In the graphs below they are manufacturing (red), mining (blue), and electricity (green).  Here's the overall look on the Q/Q% change for the last 20 years:

What I mainly want you to  notice in the above is how erratic the electricity sector is.  Current readings are no more erratic.  So let's take that out and just focus on mining and manufacturing:

While manufacturing has shown a little weakness, the biggest difference by far is in mining -- and that's where the Oil patch weakness shows up, as well as coal and metals production for export (recall how awful rail and steel have been in the Weekly Indicators for the last 4 months).

Now let's compare the present weakness with past episodes.

Here is the Q/Q% change in overall industrial production in the period from 2000 to the present, ending with Q1:.i

Note the decline in Q1 was less than -0.2%.  That's considerably less not only than prior declines associated with recessions, but even with declines where no recession occurred.

Now here is the same graphs for the 1950s and 1960s, and then the 1970s and 1980s (there was no period of weakness in the 1990s!):

Again, note that the Q1 decline in industrial production was almost trivial compared with other declines whether or not associated with prior recessions.

Finally, let's look at the recent m/m% change, to include April and May:

So far the decline in Q2 is a little bigger than that in Q1.  But still not enough to compare with past episodes of weakness that were associated with recessions.  In short, this shallow industrial recession is not derailing the robust overall economy.

Finally, a blowout housing report

 - by New Deal democrat

I have a new post up at XE.com about his morning's housing report, which was a blowout!  But don't get too excited.

US Equity and Economic Review For the Week of June 8-12; Yes, the Rally Is Getting Long In the Tooth, Edition

This is over at XE.com

Weekly Indicators for June 8 - 12 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Several recent trends in the data were amplified this week.

International Economic Review For the Week of June 8-12; Much Better, Edition

This is over at XE.com

Patterns of consumer spending: no recession near

 - by New Deal democrat

I have a new post up at XE.com, looking at two patterns of consumer spending that tend to turn near midcycle.  Neither one suggests a recession is particularly close at hand.

Actually, the labor market recovery since 2009 has been the best in 25years

 - by New Deal democrat

[UPDATE: After I published this article, I realized that I used an incorrect measure of hours worked, namely, hours for manufacturing, series AWHMAN, instead of the correct measure, hours for all jobs, series AWHI.  Using the correct measure does change the results somewhat.  The updated and corrected measures are here .  The updated results show that the current expansion is better than 4 of the previous 7, but worse than 3 others, mesured 69 months from the beginning of the expansion.  Essentially, while the number of hours and the nominal wages paid both show mediocre growth, the longevity of the expansion makes up for those deficiencies.]

Every month we read stories about what a poor labor market recovery this has been.  The latest articles were from Profs. Brad DeLong and Menzie Chinn.  I respectfully disagree.

With few exceptions, people don't get a job for social reasons.  They go to work each day in order to earn money to purchase necessities, discretionary goods, and to save for future needs.  In short, they work because of cold, hard cash.

So why is it that most economic writers appear to think the defining element of a labor market recovery after a recession is the number of jobs created?

Let me give you a few examples.

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that's clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let's compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let's compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one -- those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.

So let's compare the increase in real aggregate wages -- the total wages paid to all nonsupervisory workers, adjusted for inflation, from their bottom in each recession.  Since that was 5 years and 11 months ago for our current recovery, that will be our measuring stick.

Below are the graphs of aggregate real wages for each of the last 6 recoveries (and from the start of the series in January 1964), measured to a point 5 years and 11 months after their recession bottom. This is calculated as follows:

average hourly earnings for nonsupervisory workers, times average hours worked, times the number of jobs, and then divided by the consumer price index, with the result indexed to 100 at the bottom.  Here are the results:

1964 (start of data) +35.9%

1971: +17.1% (+20.6% at July 1973 peak)

1974: +13.6% (+23.3% at March 1979 peak)

1982: +21.0%

1991: +16.4%

2001: +10.1%

2009: +18.8%

Quite a different, and I believe more accurate, measure than simply comparing payrolls.   We can immediately see the effect of labor bargaining power, as all of the economic expansions before the 1980s showed far faster real aggregate wage growth than any expansion since.  Also important are the big decreases in interest rates, such as coming out of the 1982 recession, and the impact of big changes in gas prices.  

The bottom line is that,  measured 5 years and 11 months out from the bottom, this labor market recovery has been the third best of the 7 expansions, behind the 1960s and 1980s.

The American consumer comes roaring back

 - by New Deal democrat

This morning's retail sales report marks the demise of one of the two weak areas in the US economy.

Last fall, there was a debate as to whether the decline in gas prices would be a net positive for the US economy, as an unambiguous positive for consumers (the majority view) vs. a negative due to impact on the Oil patch (Doomers!).  Prof. James Hamilton of Econbrowser wrote that the weakness in the Oil patch would be more concentrated and sooner, while the positives would be diffuse and take place over a longer period of time.  That's what has happened.

With this morning's revision, even in April real inflation-adjusted retail sales exceeded their previous November high.  With an additional gain of +1.2% in May, they have blown through the previous high by about 1%, even after inflation is taken into account (May inflation hasn't been reported yet).  The graph below includes the revised data through April (blue), together with the broader measure of real personal consumption expenditures (red):

Not only are retail sales and real retail sals at new highs, but it is almost certain that per capita real retail sales also made a new high in May.  This last measure is a pretty reliable long leading indicator, so it suggests the economy will continue to grow at least into the second quarter of next year.

to summarize:

1. there really was a bout of winter weakness due to unusually rough weather.

2. there has also been transitory weakness concentrated in the Oil patch, but as indicated by initial jobless claims, and as of this morning, consumer purchases, have outweighed that weakness.

3. take heart, Doomers!  Industrial production still stinks, due to the overly strong US$.

Test photos post

If you are seeing this, that means that I can circumvent the clusterfk of Apple's IOS 8.3 rendering Picasa inoperable, by using the Blogger App.

I spent 3 hours at the Genius Bar at my local Apple store yesterday, after the latest upgrade for all intents and purposes turned my iPad into a brick.

April 2015 JOLTS report: the first sign of an approaching employment peak"-

- by New Deal democrat

I have a new post up at XE.com discussing yesterday's JOLTS report.  Although the number of job openings are soaring, my takeaway was decidedly cautious.

The Pied Piper of Doom is still an idiot, US Tresuury market edition

 - by New Deal democrat 

After a very long hiatus, the Pied Piper of Doom is back, determined to maintain Daily Kos as a laughingstock of economic "analysis."  His latest bit of expertise is to trumpet, via Wolf Richter, that they US treasury market is imploding, because it has been manipulated, titled Is this why US Treasuries are diving?:

The global bond market swoon wiped out $1.2 trillion in value since April. Bonds with long maturities suffered the most. The 10-year Treasury Note Price Index lost 3.2%. The 30-year yield, at 3.1% currently, is still very low, but it’s the highest since October 2014. And the 30-year Treasury Bond Price Index has dropped 9%.....
There are numerous reasons for this scenario – a very benign scenario where the greatest credit bubble in history winds down gradually, in small steps with many ups and downs that give the “smart money” time to reposition, rather than suddenly and all at once.And today we learned of another reason.....
So how tempting would it be to manipulate this monster [US treasury] market? Very, apparently.

Turns out, the Department of Justice smells a rat in this until now pristine Treasury market, according to the New York Post ....And now that the probe by the DOJ has started some time ago, we can assume that a finely-honed flurry of activity has broken out at these banks ....In the process, Treasury prices, left to the vagaries of the markets, which have already been spooked by the Fed’s interest-rate cacophony and other factors, are beginning to swoon from their manipulated perch.

Now, mind you, as far as I can tell Wolf Richter is basically Some Guy on the West Coast, but let's pass that.  Last month I caught him cherry-picking trucking data, claiming that April trucking had "fallen again" from March, based on a misleading YoY comparison, despite a huge month-over-month gain shown in the actual data.

But to t he specific point.  Here is a graph of 10 year US Treasury yields over the last year:

As you can see, since their January bottom, and particularly since mid-April, they  have risen about 0.75%.

Evidence of unwinding manipulation?  Well, let's test that by comparing Treasuries with yields on 10 year UK gilts:

Oh, dear.  It appears someone neglected to tell the British that it was US Treasuries were being manipulated, not Gilts, since they fell even more than Treasuries, by 0.85%.

And how about those sternly upright Germans?  Here's their 10 year Bund:

Now the Germans really have a right to be frosted.  Despite the fact that the alleged manipulation was of US Treasuries, German bunds have unwound the most of all, rising about 0.90% just in the last month and a half! Much more than Treasuries, which only sold off by about 0.55% during that time.

So, what might account for these moves?  Well, let's look at the news from the last week in January.  Did anything interesting happen?

Well, first of all gas prices bottomed.  This marked the end of the big deflation scare, which had dominated the Doomers at the end of 2014.

Secondly, there was this little matter that on January 25, as the BBC reported,  "Anti-austerity Syriza wins election."  Since then, of course, there has been a prolonged version of the annual spring Eurocrisis. Here's the take one week ago from the Financial Times:

 Yields on U.S. Treasurys and German bunds hit 2015 highs on Wednesday, extending a recent government-bond selloff, after a wave of upbeat economic data highlighted the valuation concerns that have nagged investors for months.
Wednesday’s price decline is the latest sign that traders and portfolio managers are once again recalibrating their expectations for the major Western economies and financial markets, following an early-year brush with deflation fears that briefly sent yields on 10-year German debt within range of zero.

Now, the Pied Piper of Doom most likely will counter that he is merely a neutral, detached observer passing along an item of interest.  Why, he isn't endorsing those views in the slightest!  He reports, you decide.

So I am sure he will pass along the FT's take on matters, above.  Or maybe

Bloomberg's. Or a sample from Business Insider.  Just for examples.

Don't hold your breath.

 

From Bonddad:

 

The PPoD (tm) has been skirting the DK copyright policy forever and a day.  FYI: here's the guidance:

 

1. Copying and pasting complete copyrighted articles without permission from the copyright holder is absolutely prohibited by both this site's policies and copyright laws. Copyright infringement can expose both you and the site's owners to financial liability. Just don't do it. And if you see someone else doing it, please politely ask them to edit their diary accordingly. This is a bannable offense.

1. Limited copying within the bounds of the doctrine of "fair use" is permitted. A reasonable rule-of-thumb is that copying three paragraphs from a normal-length news article or editorial is acceptable. (This, however, is not a safe-harbor. If even three paragraphs seems like "too much," then copy less or nothing at all.) For more on fair use, please visit this site.

Yes, he always gets permission to post someone else's stuff.  But, he been doing this for YEARS.  Can't someone with his deep knowledge, capabilities and connections write an in-depth, well-researched and documented article on his own?  I guess not.  Finally, I would guess that because the editors of DK just love this guy to no end, the regularly let him ride up to the rules without any consequence.

My two cents, inflation adjusted.

 

US Equity and Economic Review For the Week of June 1-5; Are the Weekly Charts Topping Out? Edition

This is over at XE.com

Weekly Indicators for June 1 -5 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.

Unsurprisingly, the big news among high frequency indicators was the further upwarrd spike in interest rates.

International Economic Week in Review: A More Positive Tone, Edition

This is over at XE.com

May jobs report: the score is consumer expansion 1, industrial recession 0

- by New Deal democrat

HEADLINES:

• 280,000 jobs added to the economy
• U3 unemployment rate up +0.1% to 5.5%

With the expansion firmly established, the focus has shifted to wages and the chronic heightened unemployment.  Here's the headlines on those:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: down  -200,000 from 6.258 million to 6.058 million
• Part time for economic reasons: up +72,000 from 6.580 million to 6.652 million
• Employment/population ratio ages 25-54: unchanged at 77.2% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up +0.3% from $20.91 to $20.97,  up +2.0%YoY. (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.)

March was revised up by +34,000, butApril was revised down by -2,000, for a net change of +32,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were virtually all positive, or at worst neutral, after 3 negative months.

• the average manufacturing workweek was unchanged at 40.7 hours, but April was revised down -0.1.  This is one of the 10 components of the LEI and so will affect it negatively (for April).


• construction jobs rose by 17,000. YoY construction jobs are up 273,000.  


• manufacturing jobs rose 7,000, and are up 175,000 YoY.

• Professional and business employment (generally higher-paying jobs) rose 64,000 and are up  673,000 YoY.


• temporary jobs - a leading indicator for jobs overall - rose by 20,100.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by 311,000 to  2,418,000, compared with December 2013's low of 2,255,000.

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

• Overtime was unchanged at 3.3, from an upwardly revised April.


• the index of aggregate hours worked in the economy rose 0.3 from 103.0 to 103.3.


• The broad U-6 unemployment rate, that includes discouraged workers was unchanged at    10.8%

• the index of aggregate payrolls rose by 0.6% from an upwardly revised 123.0 to 103.3.

Other news included: 

• the alternate jobs number contained in the more volatile household survey increased by 189,000 jobs.  This represents an increase of 2,833,000 million increase in jobs YoY vs. 3,058,000 in the establishment survey. 


• Government jobs increased by 18,000.

• the overall employment to population ratio for all ages 16 and above rosse +0.1 59.4%,  and has risen by +0.4% YoY. The labor force participation rate also rose 0.1% fr om 62.7% to 62.9%  and is unchanged YoY (remember, this includes droves of retiring Boomers).

SUMMARY:

This was an almost perfect report.  Almost everything moved, significanlty, in the right direction.  About the only negatives were an increase in part time for economic reasons employment, and a slight increase in the unemployment rate, but that was due to an increase of people entering the workforce.

Last month the leading portions of the employment report were sounding an alarm. This month that was all reversed. Only the continuing decrease in mining jobs, -65,000 so far this year, demonstrated the continuing effects of the very strong dollar on exports, but this was swamped by the positive news everywhere else.

 So the takeaway from this report is that the consumer expansion is outscoring the shallow industrial recession.

State sales tax receipts: poor consumer sales still look like an Oil Patch issue

 - by New Deal democrat

In addition to poor industriall production, that appears to be a matter of an overly strong US$, the other part of the US economy that has failed to grow this year is consumer spending, particularly as measured by real retail sales.

Several months ago I looked at state sales tax receipts as a proxy for consumer spending, and concluded that the very harsh winter was responsible for poor sales at the beginning of this year. I updated the analysis one month ago, suggesting the effects of winter had passed, and the continuing weakness was an Oil patch phenomenon.  The latest information, through April, indicates that continues to be the case. Note that the actual sales may have taken place in the month before the revenue was remitted to the state.

The epicienter of poor winter sales numbers was New York and Massachusetts. That appears to have abated, at least in New York.

In March, New York reported at +5.1% YoY increase in sales tax receipts.  In April, the increase was +4.5% YoY. In January New York reported sales tax receipts up +4.2%, and in February they were actually down -0.3% YoY.

As to Massachusetts, the record is more subdued. In March it reported a +1..9% YoY increase in sales taxes.  In April that went down to +0.6% YoY. Campare that with than January's +0.6% YoY rate, and February's +0.2%.

Now contrast that to what has happened in Texas.  When I first reported on state sales taxes, Texas had YoY comparisons of +11.2% in January and +11.7% in February. But look at the last two months, as reported by the Dallas News:

State sales tax collections in April grew by only 1.1 percent over the previous year, as a “significant slowdown” in oil and gas-related activity pinched previously robust growth, Comptroller Glenn Hegar said Wednesday..... 

He said collections of the 6.25-percent state sales tax in the trade, restaurant, construction and manufacturing sectors “continued to grow” last month. ...   

March receipts grew by just 1.5 percent over last year.Texas hasn’t seen sales tax growth that was so low, low, low in the single digits since spring of 2010.....

That's a huge slowdown, and almost certainly means month-over-month decreases, if we were able to seasonally adjust!

At the end of June, the Census Bureau will report state by state retail sales for the first quarter.  The evidence from state sales tax receipts is that it will confirm that the ongoing weakness in consumer spending is primarily an Oil Patch issue.

Americans continue to rebuild savings

  - by New Deal democrat

It is a very rare occurrence when I agree with the Washington Post's Robert Samuelson, and disagree with Dean Baker, but this morming is once.  Sanuelson wrote that

 [T]he 2008-2009 financial crisis and the Great Recession... changed economic psychology, precisely because they were unanticipated and horrific. They transcended the experience of most Americans (that is, anyone who hadn’t lived through the Great Depression)....
The financial crisis and Great Recession have left a thick residue of anxiety. Companies and consumers responded by restraining spending, which (of course) weakened the recovery. 

Baker disagrees, saying

The problem is that the data refuses to agree with his psychoanalysis. As I pointed out yesterday, consumption is actually higher as a share of GDP than it was before the downturn, indicating that fear is not keeping households from consuming in any obvious way.

Respectfully to Prof. Baker, this morning's report on April income and spending shows that American households continue to demonstrate Keynes' paradox of thrift.

The good news is, real personal income, both with and without taking into account governmet transfer payments, rose to new highs:

This is why this year's "shallow industrial recession" shown in industrial production generally, and steel and rail particularly, hasn't spread to a recession in the entire economy.

The bad news - for economic growth - is that they didn't spend any of that increase, as real personal consumption expenditures for April, like the more narrow measure of real retail sales, declined ever so slightly:

Simply put, Americans continue to save rather than spend thei money they are no longer spending to fill up their gas tanks.

As a result, the personal savings rate went back up to 5.6% in April.  But to put that in context, here is the graph of the personal savings rate going all the way back to 1990:

In the early 1970s, the personal savings rate was as high as 14%+.  As the graph shows, it gradually decreased to 2% in 2005. It has been increasing secularly since.  Note that the sudden decline at the beginning of 2013 marks the time when the temporary 2% reduction in Social Security withholding expired.  Consumers responded not by cutting back, but rather by digging deeper into their savings. Since then, the increasing secular trend has reasserted itself.

This is of a piece with the steep decline in household debt burdens that began with the Great Recession.

So I think Samuelson is correct that the events of the last 10 years profoundly affected consumer psychology, leading to more cautious spending.  That households are rebuilding their balance sheets is a good thing - in moderation - so long as it merely holds back growth a little and doesn't tip us back into recession.

(P.S.  Many thanks to my "underpaid and sexually harassed secretarial service," a/k/a Bonddad, for iinserting the graphs.)