Weekly Indicators for December 7 - 11 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

Due to the reversal of Thanksgiving Day seasonality, we improved from absolutely horrible to merely bad this week.

New progressive blog aggregator

 - by New Deal democrat

By way of exploring a big increase in the number of reads of this here blog (YAY!!!), I stumbled upon a new progressive blog aggregator, ProgBlog .

The most recent headlines and ledes from probably over 100 progressively-oriented blogs are included in chronological order.  This is a good way to scan for stories of interest in just a minute or two.  It won't substitute for your daily reading of economic blogs, as I think this blog and Calculated Risk are the only two mainly economic blogs included, but well worth adding to your favorites and checking once or twice a day.

Good news and bad news on retail sales

 - by New Deal democrat

This morning's retail sales report can be summarized as follows:

• +.2% headline
• +.4% ex-auto
• +.3% ex-gasolinle

which is something of a reversal of recent months, where auto sales have done the heavy lifting.

Let me get the good news out of the way first. Once the CPI comes out next week, we will probably find out that November set a record.  This is because gas prices account for most of the month to month variability in the CPI.  There is an underlying core inflation rate of between +0.1% and +9,2% each month, so if we take that, as well as the volatility of gas prices, into account, we almost always can identify the direction, and ususally the fluctuation +/-0.2%, of the overall CPI number.

Here's what the last year looks like, including the change in November gas prices:

November CPI is likely to be no higher than unchanged, and could easily decline by -.4%.

Let's apply that to real retail sales (red in the graph below) compared with nominal retail sales, both normed to 100 as of October:

If consumer prices are up by no more than +.1%, we will tie the previous record -- and we are likely to surpass it.

The bad news is that, even so, the above graph suggests that real retail sales are flattening.  This is not uncommon in the 18 months before a recession.  Just another sign that we appear to be later in the cycle.

Single family housing is outperforming multi-unit housing. And that tells us . . .

 - by New Deal democrat

The first thing it tells us, is that I can write a click-bait headline sending you over to my newest post up at XE.com to find out the answer.

Gas prices finally break below last winter's low

 - by New Deal democrat

Last winter gas prices bottomed at $2.02.  For the last 2 weeks, gas prices flirted with, but never broke through, that low.

Until yesterday.  Average US gas prices are now sitting right at the $2.00 mark:

I don't know how much further they may fall. The bottom could be anytime between now and early February.  Since in the last 10 years, the seasonal top and bottom in gas prices has tended to be about $1 apart, in summer I thought the bottom might be at about $1.82.  Here's what I wrote about the summertime peak only being $0.80 above last winter's low back in July:

This tells us that the medium term trend in gas prices, taking out seasonality, is still down.  That suggests that gas prices are going to fall below $2/gallon this winter.

 We'll probably continue below the $2 mark in the next few days, but I doubt we'll make it all the way down to my original forecast low.

But this does show a continued deflationary background to the economy, and a continued slight boost to most consumers' wallets.

The Future is Bright . . . or perhaps not

 - by New Deal democrat

Bill McBride a/k/a Calculated Risk has reiterated his case for optimism, in "The Future's So Bright . . ."  While I like and respect Bill, and both of us believe the housing market is crucially important, both of us in important part due to a terrific 2007 paper by Professor Edward Leamer, "Housing IS the business cycle,"  this is one point where I part company with him.  It's not that I am pessimistic. I just do not believe that his argument supports his conclusion.

To show you why, let me take each of his points in order, frequently using his own graphs.

First of all, he cites housing, using the following graph of single-family (blue) and total (red) starts:

Notice the huge bulge in multi-family starts from the beginning of the graph (1968) through the late 1980s, as the Boomer generation hit young adulthood.  Bill focuses on this demographic argument, saying "Demographics and household formation suggests starts will increase to around 1.5 million over the next few years."

But note that even that bulge did not prevent huge downturns in 1970, 1974, and 1980-82.  So there is a secular tailwind -- but turbocharged volatility to both the upside and the downside.

Next, Bill cites growth in state and local government jobs, which are clearly lagging indicators for the economy. The reason is, these follow revenue collection, and revenue collection only starts to fall/rise after the recession/recovery starts:

Next, he cites deficit reduction:

But note when the "peaks," or at least smallest deficits have occurred:  in 1989, 2000, and 2007 - in other words, just before the onset of each recession.  This is a coincident indicator.  That the deficit continues to fall simply means that the expansioin is continuing, and doesn't really tell us anything about the future.

Next, he cites household debt levels.  These have fallen to 35 year lows. but are at levels they were in 1981 when the Fed raised rates and engineered a recession anyway! And while they bottomed in mid-expansion in the 1990s and 2000s, they peaked in 1986 and fell off in the years leading to the 1991 recession:

Bill also cites total household debt:

But notice when this graphic last peaked:  in the 3rd Quarter of 2008!  This is a coincident to slightly lagging indicator.  So I don't see where we can make any useful forecasts based on household debt levels.

Next, Bill cites the architectural billings index.  But this is for commercial construction (blue), which lag residential construction (red):

 Further, the index is current at similar levels to where it was in 2000 and 2007:

So I don't see how it can serve as a useful economic forecasting tool.

Finally, he cites the renewed growth in the prime working age 25 - 54 demographic.  If that were true, then real YoY GDP growth ought to correlate well with YoY population growth in this demographic.  But as shown in the  graph below, which subtacts the YoY% change in this demographic from the YoY% growth in GDP, while the deceleration in growth of the prime working age demographic has generally correlated with a deceleration in real GDP since 1985, the relationship does not hold true at all for the 1965-85 period when the prime working age demographic was growing at an accelerated rate - but real GDP growth was decelerating:

UPDATE:  Here is a graph of the two components broken out separately, so you can see the acceleration of growth in the prime age demographic as the Boomer generation hit (blue), but the simultaneous deceleration of real GDP growth (red):

Bottom line: I am not persuaded by Bill's fundamental analysis, which relies mainly on coincident and even one lagging indicator.   I think there is considerable merit to his demographic argument (but see my caveat above), but I think there are two other long-term trends that will prove more important.

First, the long-term decline in interest rates is almost certainly over.  Interest rates will either go sideways or up from here.  Periodically refinancing debt at lower interest rates has been a vital middle class strategy since the early 1980s, but that well has prbobaly run dry:

as supported by Bill's own graph of mortgage refinancing since 1990:

Secondly, the entry of a large demographic into the labor force tends to depress wages (as did the Boomers between 1974-95).  Even without that headwind, wages have basically stagnated since 2000:

The American middle class will only make progress for the next few decades to the extent that its real income rises - something that, with the exception of the late 1990s tech boom, and the oil price crash of 2008, has been largely elusive for 40 years.  Whether the future is bright or not will depend most of all on how that wage issue plays out.

BREAKING: ISIS is armed with 1000s of dildos!!!

 I'm sorry, but that's the first thing that leapt to mind when I saw this photo above a CNN story about ISIS:

Yes I do have a warped mind.  Why do you ask?

JOLTS, Labor Market Conditions Index continue to show a maturing expansion

 -  by New Deal democrat

Two jobs-related releases yesterday and today continue to show decelerating improvement.

Yesterday the Labor Market Conditions Index was released.  This has an excellent long term record of forecasting the direction of YoY job growth.  Here is the long term view:

Here is the short-term view over the last 10 years:

While the Index improved in the last month, the rate of change was the worst in 3 years bar 2 months earlier this year:

The YoY% change in jobs growth also declined to a new low after its likely February 2015 cycle high.

Turning to this morning's JOLTS report for October, it was something of a mirror image of last month: openings declined, but actual hires and quits improved.

Here is the long term view since the inception of the series:

The pattern looks increasingly like that of ~2006 in the last cycle.

There was some limited good news in that both hires and quits turned ever so slightly positive YoY:

But this YoY level is well below that of the last 2 years.

Quits did tie a record for this expansion:

And hires seem to have a slight improving trend, although this month's level did not set a record.

Although - barring another upward surge in the US$ - I do not see any recession in the near future, the jobs market shows accumulating signs of a maturing expansion.

A closer look at underemployment

 - by New Deal democrat

One of the big success stories in the labor market this year has been the progressive decrease in the discouraged and the underemployed.  The below graphs both add together those "not in the labor force but who want a job now" and "part time for economic reasons."

Here is the big picture since the beginning of the modern series in 1994.  Note that the low occurred at the height of the tech boom in 1999 at 7.483 million. I have subtracted that so that you can see how much of an increase there has been since then:

At its post-recession worst, an additional 8 million people had been thrown into this category.  That is equivalent to over 5% of the workforce!

The big decline has taken place beginning with the 3rd Quarter of 2014, which I've zoomed in to show below:

Even so, at present we are 2 million or more above the tepid levels of 1996 and 2004-05. At our 2015 rate, it will take another 5 quarters for us just to get to that level.  And with the Fed raising rates, I am not confident at all that we will sustain our recent pace.

US Bond, US Equity and International Week in Review

These are over at XE.com

US Equity

US Bond

International

If 2016 is 1972 redux, is Hillary Clinton the Democrats' Richard Nixon?

 - by New Deal democrat

BooMan has had several good articles in the past week analogizing the 2016 election to the Democrats' disastrous 1972 nomination of McGovern, who thereafter was epitomized by the GOP as the personification of "the loony left."   I have long thought that 2008 marked the beginning of a secular political shift in the US electorate. In the past 225 years, the US has had 4 such paradigms:

1. 1788 -1860: Ascendancy of the Southern and Western planters. Four of the first 6 US Presidents came from Virginia. Beginning with 1828, the Jacksonian democrats were ascendant until the political parties completely fractured in 1860.
2. 1860 - 1932 The "Grand Old Party."  During this period, the Democrats were the party of "rum, romanism, and rebellion" and were trounced except for the two terms of Grover Cleveland and Woodrow Wilson (who won in 1912 in part courtesy of the fracturing of the GOP with Teddy Roosevelt's "Bull Moose" insurgency).
3. 1932 - 1980. The New Deal Democrats.  This is self-expanatory.  The New Deal coalition started to fracture massively in 1968, and was completely routed by 1980.
4. 1980 - 2008. The GOP Southern Strategy.While Nixon claimed that "We are all Keynesians now," Reagan repudiated as much of the New Deal as possible, and Bill Clinton came full circle, declaring that "the era of big government is over" in 1995.

In 2008, Barack Obama began to put together a new coalition that included Latinos and some Rocky Mountain social libertarians in addition to women, blacks, and a new "Solid Northeast" that expanded to include Virginia, with Florida and North Carolina in play as well, courtesy of a critical mass of transplanted Yankees. This coalition was forreshadowed and described in "Whistling Past Dixie," which encouraged democrats to look West rather than try to win back working class whites in Dixie.

Booman's analogy is that, in a mirror image of 1972,  now it is the GOP that appears hopelessly fractured between the right-wing but sane candidates (Jeb Bush, Rubio, Christie, Kasich, Graham, and Potacki) and the right wing and also insane candidates (Trump, Carson, Fiorina, Cruz). As an aside, I think the basic test for which wing a candidate falls within is, Would the modern version of LBJ's "Sunflower" ad against Goldwater, which strongly implied that Goldwater couldn't be trusted with the nuclear arnsenal, be effective against the GOP nominee?  If it's Trump, Carson, Fiorina, or Cruz, I think it would.

But if the GOP candidate is the modern McGovern, it is intriguing to consider whether Hillary Clinton is a modern analogue for Tricky Dick Nixon.  I think a fair case can be made that she is.  She is certainly seen as cold and both overly and overtly calculating.  While nothing she has done may be outright unlawful, there's a lot that looks really sleazy.  Remind you of some 1972-ish candidate? (I am assuming she will be the nominee, although I prefer Sanders).

The important thing to remember is, Nixon won - in a landslide.  This was in part due to a strong economy (almost every economic indicator was solidly positive throughout 1972 despite increasing inflation), and partly due to his being seen as a fundamentally sure hand on the rudder.  While the jury is still out on the economy -- but barring even more strength in the US$, I do not see a recession starting before the election -- I think most voters, even those with a strong distaste for her, are likely to see Hillary Clinton as a fundamentally sure hand on the rudder.

So if 2016 is like 2012 -- a fundamental change ongoing, but not yet at fruition in the electorate -- then the truth is, there are parallels on *both* sides of the aisle.

Weekly Indicators for November 30 - December 4 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

Appropos of Star Wars, we are all familiar with the Millenium Falcon's "hyperdrive."  Well, that's what Thanksgiving seasonality did to the intensifying commodity slump, and some other indicators too.

November jobs report: truly a mixed report, but enough for the Fed

- by New Deal democrat

HEADLINES:

• 211,000 jobs added to the economy
• U3 unemployment rate unchanged at 5.0%

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 -416,000 from 6.052 million to 5.636 million
• Part time for economic reasons: up 319,000 from 5.767 million to 6.086 million
• Employment/population ratio ages 25-54: up from 77.2% to 77.4%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.01 from $21.18 to $21.19,  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.)

September was revised upward by 8,000.  October was also revised upward by 27,000, for a net change of +35,000.

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.

• the average manufacturing workweek was unchanged at 41.7 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased.by 46,000.  YoY construction jobs are up 259,000.  
 
• manufacturing jobs fell by -1,000, and are up 28,000 YoY.

• Professional and business employment (generally higher-paying jobs) increased by 28,000 and are up 298,000 YoY.


• temporary jobs - a leading indicator for jobs overall decreased by -12,300.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose by 80,000 from 2,326,000 to 2.406,000.  The post-recession low was set 3 months ago at 2,095,000.

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

• Overtime was unchanged at 3.2 hours.


• the index of aggregate hours worked in the economy fell by -0.1% from  104.4 to 104.3. 
 
• The broad U-6 unemployment rate, that includes discouraged workers rose by  0.1% from 9.8% to 9.9%. 

•  the index of aggregate payrolls rose by 0.1%  from 125.6 to 125.7-.

Other news included:      

• the alternate jobs number contained in the more volatile household survey increased by 244,000  \jobs.   This represents an increase  of 2,031,000  jobs YoY vs. 2,609,000 in the establishment survey.  
 
• Government jobs rose  by 14,000.  

• the overall employment  to population ratio for all ages 16 and above was unchanged at 59.3% both m/m and  YoY.  The labor force participation rate rose by 0.1 from  62.4%  to 62.5%  and is down -0.3% YoY (remember, this incl udes droves of retiring Boomers).  

SUMMARY: 

This was actually a mixed report, with some good positives and some nasty negatives.

The positives, in addition to the headline jobs number, included substantial upward revisions in hours and jobs to last month. Those not in the labor force, but who want a job now, dropped by over 400,000 to a new post-recession low, more than outweighing the increase in involuntary part time workers. Construction and high paying professional and services jobs continue to increase. The prime age employment to population ration is now almost exactly halfway back to its peak almost a decade ago.

The negatives were first and foremost, wages, which after inflation, probably declined in November. The YoY change in wages for non-supervisory personnel is back to +2.0%.  My biggest fear is that in the next recession, this will actually go negative, i.e., there will be outright wage deflation. Aggregate hours dropped month over (upwardly revised) month, and aggregate payrolls rose a pathetic 0.1%..  The YoY change in job growth continues to decelerate from its peak a year ago, continuing to signal that we are later in the economic expansion.

This will presumably be enough for the Fed to raise rates, the lack of wage-push inflation be damned.  Hopefully they won't drive the economy into a new recession next year. .

November ISM non-manufacturing confirms consumer growth

 - by New Deal democrat

This morning's ISM services report shows some weakening, but still no cause for any immediate concern.

Note that because the "ISM services" index only has about 8 years of data, in this post I am making use of "ISM non-manufacturing" which dates to 1997.

Below I've done the same thing I did with ISM manufacturing two days ago: I subtracted 58.2 from the current reading so that it shows exactly at zero (blue).  I also again included ISM manufacturing (red):

There have been 5 times since 1997 that ISM non-manufacturing crossed its current bound to the downside: 1998, 2000, 2002, 2006, and 2011.  The most bearish of those was October 2000, only 5 months before the onset of the next recession.  The non-manufacturing reading was much weaker not just at the onset of the 2008 recession, but for 2 years prior!  On the other three occasions, (1998, 2002, and 2011), there was no recession at all.

Since the 2000 recession is the closest analogue to our current situation -- an industrial slowdown triggered by a strengthening dollar -- obviously there is some cause for concern, and the US$ bears watching exceptionally closely.  At the same time, today's reading like yesterday's motor vehicle sales confirms that the consumer part of the economy continues to outweigh the industrial weakness.

The importance of record November vehicle sales

 - by New Deal democrat

The preliminary information shows that vehicle sales for November set yet another post-recession record: 

( h/t Calculated Risk )

This is definitely *not* something that happens on the cusp of a recession.  If the "shallow industrial recession" I have been writing about for most of this year is deepening, it hasn't deepened enough to take down the consumer.

The 2001 recession was largely driven by a downturn in business investments -- but even there, vehicle sales did decline from a peak one year prior to the commencement of the downturn:

If the global downturn were being imported into the US via the stronger $ with sufficient force to cause not just a more pronounced slowdown, but an outright contraction, it would show up in fewer vehicle  purchases. We're simply not there.

November ISM index confirms intensified deflationary pulse. Can the Fed listen?

 - by New Deal democrat

For the last month in my "Weekly Indicators" column, I have been writing about an intensified deflationary pulse in the US economy.  For example, one month ago in my summary I wrote:

"Several intensified trends are emerging.  The positive trend is increased spending by US consumers as imported deflation finally teams up with a little improvement in wage growth. The negative trends are increased downturns in rail, shipping, and steel - i.e., that part of the US economy most exposed to global weakness - which have been joined by intensified strength in the US$ and a nascent upturn in interest rates courtesy of an anticipated December rate hike by the Fed."

This renewed pulse has now shown up in the November ISM index, which fell to a 3 year low of 48.6.  This is actual bad news, showing an economy that is near contraction.  The silver lining is, we have seen plenty of times before where the ISM index fell to this level without the economy going into recession.  In the below graphs I subtracted 48.6 from the reading, so that the November reading is at the 0 line.  Here is 1948- 1980:

and here is 1981 - present:

A level between 48 and 50 way associated with an oncoming recession 10 times -- and just a mid cycle correction another 8 times.

The simple fact is, the US$ has been accomplishing a tightening without the Fed hiking rates at all.  Here is the chart of the broad trade-weighted US$ since it began its ascent in July 2104:

In November it surged again to new highs.

At some point if the industrial recession becomes deep enough, it could overcome the still-growing consumer economy.   The strengthening US$ was certainly a factor in the 2001 recession:

 At present, however, unlike 2001, neither the yield curve nor housing nor real money supply are playing along. 

But this is a potent reason for the Fed to pull back on their rate hike plans.

New home sales vs. housing permits - how unusual is the divergeance?

 - by New Deal democrat

I have a new post up at XE.com .  The latest housing data from October shows a new high in single family housing permits, but new home sales haven't made a new peak since February.  What gives?  I take a look at the historical record, and find an interesting nerdy nugget.

International, US Equity and US Bond Market Week in Review

International

Bond Market

Equity Market

Weekly Indicators for November 23 - 27 at XE.com

 - by New Deal democrat

My Weekly Indicator column is up at XE.com .  The intensified deflationary pulse that we have seen in the last several months continues.

Corporate profits (through Q3 2015) as leading indicator for quarterly stock prices

 - by New Deal democrat

I have an update up at XE.com, comparing corporate profits through Q3 with stock prices.