Weekly Indicators for February 15 - 19 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .  Several data series flipped this week.  Most notably, Real M1 decelerated sharply.

The worker/consumer is alright: real retail sales and real compensation

 - by New Deal democrat

With this morning's report that consumer prices were unchanged in January, I can update several of my favorite series.

First of all, real retail sales as expected, increased to a new record:

Evidence that an intact consumer has continued.

More importantly, real average hourly income also increased to a new 35 year record:

And real aggregate income for workers increased to +19.5% from its 2009 recession low:

For comparision pursposes, this in only about 1% behind the 1980s Reagan recovery an equivalent number of months out from the 1982 bottom.

So, continued good news on the worker and consumer side of the ledger.

Corporate profits: why the US in not in recession

 - by New Deal democrat

The other day I wrote that the current slowdown does not meet the definition of a recession.  It is not a broad downturn in production, sales, income, and employment, but rather an intensely focused downturn in prodcution and sales in the commodity and export sectors, that has not spread to other manufacturing sectors, and not to consumers at all.

I neglected to include a brief discussion of corporate profits.  There is no doubt that corporate profits, in the aggregate, have declined over the last year. But it turns out that same division between energy sectors and everything else also applies.

Here is a graph from Recession Alert, comparing S&P 500 profits as a whole vs. the S&P ex-energy, with 74% of all companies having reported for the 4th Qaurter of 2015:

Ex-energy, S&P corporate profits improved through the 3rd quarter, with only a slight decline in the 4th quarter.

Another similar comparison comes from Bloomberg, which compares profits overall with profits of consumer stocks:

Profits in consumer sector have continued to increase.

So corporate profits support the conclusion that this is an intense but narrowly focused downturn.

Leading Indicators: not good, but not DOOOMED either

 - by New Deal democrat

The January index of Leading Economic Indicators fell -0.2, its 4th decline in 7 months, as shown in this graph from Briefing.com:

While this isn't good, if historical patterns hold, it is not consistent with a recession happening yet.

Typically it takes at least 8 of the 10 indicators falling over a 6 month period to herald the beginning of a recession:

Between July of last year and January of this year, 5 of the 10 indicators fell.  One was neutral, and 4 improved.  At least two of the 5 declining indicators that fell (initial claims, which have improved in the last few weeks, and housing permits, which only suffered due to comparison with the June spike caused by NYC) look likely to flip positive on a 6 month basis this month.  Incidentally, permits is the only series on the "consumer" side of the ledger to have declined.

It is also worth noting that on the producer side of the ledger, "core capital goods orders" have been positive for the last 5 months, and although ISM new orders were scored negative, they actually showed slight growth in January.

So while I don't want to sugarcoat what is after all a bad number, it still does not mean DOOOM!

Industrial production: Why the US is not in a recession

 - by New Deal democrat

This morning's industrial production numbers clarify why the US economy is not in a recession.

Although the rubric of two quarters of negative GDP is common, the NBER defines a recession as a widespread downturn in production, sales, income, and employment.  This simple fact is, while our current slowdown might produce a negative GDP reading, it is simply not a widespread downturn.

Let's begin with the consumer side of the economy, and then turn to the producer side.

Employment has continued to steadily increase:

So has income:

And both personal consumption expenditures and real retail sales have also continued to increase:

So, as I said last week, the consumer is alright.

Turning to production, here are total business sales broken down by manufacturers (blue), retailers (red), and wholesalers (green):

While manufacturing and wholesale sales are down, retailers sales are not.

Now let's look at industrial production (blue in the graphs below) . Production is broken down into manufacturing (red), mining (green),  and utilities (purple): 

Although mining turned down a full year and a half ago, and utilities have suffered (in part because autumn and December east of the Mississippi remained unseasonably warm), manufacturing has continued to increase, tying its all time high in January.

There has been an intense and focused severe downturn in the sector of the economy having to do with commodity extraction and exports.  The rest of the economy has continued to improve.  That's why the US is not in a recession.

Thoughts on the Minimum Wage

     Most people who argue against the minimum wage assume labor demand is elastic, meaning the amount demanded will disproportionately change relative to price changes.  Here's a simply supply and demand chart to illustrate:

In the above chart, the government increases wages from P to P1 and demand drops from Q1-Q2.  In this example, the line Q1-Q2 is longer than P-P1, meaning the increase in price had a large impact on demand.

     However, what if demand is inelastic?  In that case, we'd be looking at the following chart:

Above we see the quantity demanded decrease slightly relative to the larger increase in price.  This means that even if wages increase, we still demand a certain amount of labor.

     The second chart is actually far more realistic.  Consider the following fact pattern: a store currently has 100 employees.  Because they're a profit maximizing entity, they are already using the optimal amount of labor (give or take say 5-7 employees).  Let's assume they cut their workforce by 25% because of the increased wages they must now charge.  At this level of cuts they'll see shelves stocked less frequently, fewer employees helping customers finding items and longer check-out lines. This will actually decrease their sales; customers will get tired of not being helped and will become frustrated with the longer lines.    

     The underlying reasoning is based on the production function, another basic micro-econ concept:

The horizontal line shows the total amount of labor while the vertical lines shows total output.  Notice that as L decreases, so does output.

      Anyway, food for thought.


      Thanks to Jared Bernstein for first pointing this out awhile ago.

[UPDATE]: Alan Kreuger's research confirms.

   

Two economic templates for 2016, Part 1

 - by New Deal democrat

The big gas price decline of 1986.

This post is up at XE.com

JOLTS: finally, a really good month

 - by New Deal democrat

[I didn't get around to posting this last week, so I'll catch up today.]

The JOLTS report is an extremely useful dissection of the labor market.  Unfortunately it has only existed for 15 years, and thus includes only one full economic cycle, and so must be interpreted with caution.

For the last year I have been unimpressed with the report.  True, job openings (blue in the graph below) were soaring to new heights, but actual hires (red) stalled -- the same pattern as in 2005-06. late in the last cycle.  Here is the complete series, including last week's report for December:

So the pattern - from one cycle - is: first, hires peak.  Then, openings peak.

Here is a YoY look at the same data:

Openings have been rising faster than hires, which are have been barely positive.

Until the last month, when hirest soared to a new all-time high, as shown in the first graph abpve at far right.

Some more good news was contained in the quits rate, which also soared (blue in the graph below):

This means that workers were confident enough in their prospects to voluntarily leave their jobs.  Note that layoffs (green) remained low.

In the last cycle, first hiring stalled in 2005 (red in the graph below), and then layoffs (green) increased in 2007:

A similar pattern exists in the longer data series of jobs vs. initial jobless claims - job growth softens, then layoffs increase, before a recession begins.

In the JOLTS series, layoffs have actually declined a little, and the big increase in hires is very positive.

Finally, Dean Baker made a point that there is "pent up damend" for quits, and therefore they should continue to all time record highs.  I started out thinking like a devil's advocate:  after all, if there were "pent up demand" for quits, if, say, there were 2 people dissatisfied and looking to move for every 1 person similarly situated in the last business cycle, wouldn't at least *some* of those extra people quit when the U6 rate were 11% and 12%, instead of all waiting until U6 hit 10%?  Surely some of those people who wanted to quit, would have actually gone ahead and done so as the situation gradually improved over time.

Well, it turns out, that's exactly what they did.  Here's a link to a graph of the U6 underemployment rate (inverted) vs. Quits:

 For every level of underemployment over the last 3 years or so, there have been more Quits than occurred during the last cycle -- just what my hypothesis predicted if there were "pent up demand."

So the bottom line is, while the report is still consistent with a maturing expansion, this was a very positive month.

My Weekly Reviews Are Up At XE.com

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Weekly Indicators for February 8 - 12 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com .  Lots and lots of "less worse."

The consumer is alright

 - by New Deal democrat

[Updated with graphs]

This morning's retail sales report gives us confirmation that the consumer economy - about 70% of the entire US economy - is alright.

While we don't know what the CPI for January is yet, we do know that gas prices continued to decline smartly, so I am not expecting a number over +0.1%, and truth be told, I am not expecting a positive number at all.

Not only was January a positive both including and excluding autos, but December was revised significantly higher, from -0.1% to +.2%.

Here is a graph for nominal (blue) and real (red) retail sales:

For what it's worth, YoY real retail sales for January will probably wind up near +2.5%:

 since last January's decline of -0.3% in retail sales falls out of the comparison:

Here's the bottom line:

1..Workers/consumers have more jobs, and are making and spending more money.
2.  Producers of commodities, and utilities and transporters of commodities are experiencing a very intense downturn, that so far has not dragged down non-commodity industrial production at all.

The story on real wages: four measures showing actual improvement

 - by New Deal democrat

In the last several years, I have written a number of posts documenting the stagnation in average and median wages, for example here and here.  Courtesy of the crash in gas prices and the decline in underemployment below 10%, there has been a change in the last 16 months.

We have a variety of economic data series to track both average and median wages:

• 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. 

All of these have now been updated through the fourth Quarter of 2015.  Let's take a look at them.

The first graph tracks monthly average (mean, not median) hourly wages (blue), median wages from the employment cost index (red), real compensation per hour (brown), and median usual weekly earnings (green). All are adjusted for inflation.  Since the quarterly index of median wages only started in Q1 2001, I have normed the indexes to 100 at that time:

Here is the same information YoY:

"Real usual weekly earnings" is now equal to its highest level since the beginning of the Millennium. The other three are at Millennium highs (as far back as two of them go).  Real average hourly earnings can be calculated back 60 years.  It is at a new 35 year high -- but still lags behind its high point in the early 1970s. And there has been an acceleration in growth in the last year.

Finally, via Doug Short Sentier Research's most recent monthly measure of median real household income also was positive:

I don't want to oversell this improvement.  It is still not nearly good enough to have a viabrant middle class.  But it does represent a significant positive.

Powerline Economic Analysis: Continuing Their Clue Free Ways

     In a post titled "Talkin' Unemployment Blues" Scott Johnson of the Powerline Blog referenced the following chart from "Shadowstats:" 

So, according to Shadowstats, the real unemployment rate is about 22.5%.  This stands in stark contrast to the U6 and U3 rates of unemployment from the BLS:

     For the sake of argument, let's assume SS is correct.  Wouldn't that mean there could be no wage pressure at all?  At that level of unemployment, employees have, literally, no bargaining power.  An employer could say, "there are, literally, 100 people who will take your job."  Yet, as the following chart from the FRED database shows, wages have increased about 2% Y/Y for most of this expansion.  That pace increased a bit over the last 6-9 months, and is now around 2.5%:

I wonder how Mr. Johnson would explain that rather glaring logical inconsistency?  

     This is but one of the many problems with SS numbers.  According to SS, their "alternate" CPI index based on 1980 calculations is ~7.5%.  If that were really the case, the 10-year would now be trading at a -5.75 yield.  (Just to help Mr. Johnson out: the current 10-year CMT was 1.75% at the close of yesterday's trading.   1.75 - 7.5 = -5.75%.  In case you were wondering, that's called "subtraction" which is a basic mathematical function.)  Trust me on this one: if the 10 year were trading at 5.75%, you'd be hearing about it.

     Here's the point.  The guys at Powerline aren't clueless; that description might imply that, at some point, they had a clue.  No: Powerline's writers are economically clue free.   Over the last few weeks, I pointed out that John Hinderaker -- who is now in charge of a conservative think tank -- thinks Minnesota should change economic policies.  This, when the state's unemployment rate is below 4% and wage gains are between 2.5%-5% Y/Y.  And now Scott Johnson is partially basing his argument on Shadowstats -- a website used by, quite literally, no reputable economist.  And this is before we consider that these guys spent the entire 2014 blog year providing economic commentary that was, literally, 100% incorrect.  That's just dumbfounding.  

     This post will have no impact on Powerline.  They'll continue to argue that they are economic geniuses.  And we'll be here to document the latest economic missive from the cluefree crowd at Powerline as they post.

     

      

The big trends of 2015 look like they are breaking down

 - by New Deal democrat

I have a new post up at XE.com .  A whole bunch of important data series moved pretty much in lockstep in 2015.  In the last month, that has broken down.

Labor Market Conditions Index forecasts further job softness

 - by New Deal democrat

Last summer I wrote that the Labor Market Conditions Index, a measure based on 19 components which was just reported just barely up +0.4 for January, was a useful addition to the forecasting toolbox.

Sprecifically, it has a 40 year history of signaling a turn in the economy.  Here is the entire history of the index: 

The index has with one exception (1981's double-dip) always failed to make a new high for at least 12 months before the next recession, sometimes much longer than that.  Further, it has always dropped below 0 and stayed negative for 6 months or somewhat more before the onset of the next recession.

Here is the Index over the last 5 years:

The Index appears to have made its cycle high at the beginning of 2012, with a secondary high in early 2014. But it has not turned negative.

Further, when the Index consistently leads the YoY% growth in jobs by 6 - 12 months, but YoY job growth (red) is a much  smoother measure:

Thus job growth serves as an important confirmation for the long leading part of the Index.

But a downturn below 0 in the LCMI, even partnered with a downturn in the growth of YoY jobs, hasn't always meant recession, as in the 1980s and 1990s.  That's where interest rates come into play.  In the 1980s and 1990s, as shown in the graph below (green), a marked increase in interest rates led to the declines in both the LMCI and YoY job growth.  

When that upturn in interest rates abated, the LMCI, and jobs, came back.  It was only when both weakened to the point where the LMCI was consistently negative, before interest rates declined, that a recession ensured.

Here is the same information for the period 2000 - present:

While the "taper tantrum" in interest rates briefly put a dent in the LMCI and YoY job growth, interest rates have calmed down since. In other words, more confirmation that we are probably past mid-cycle, but no imminent threat of an actual downturn.

On the negative side, since the LMCI does lead the much smoother YoY growth in jobs, it strongly suggests that YoY payroll growth is going to decline over the next 6 months or so.  

Six months ago I wrote that such a declien could "only happen if those payroll numbers generally come in under 225,000, and probably even below 200,000 through next winter." 

So here is jobs growth for the last 12 months:

Average growth for the last 6 months has been 218,000 per month. with 3 months upnder 200,000.

The LMCI forecasts that the decelerating trend in job growth will continue, which means I expect average jobs growth during the next 6 months to continue to average under 225,000.

Just When You Thought The Boys At Powerline Couldn't Become More Economically Incompetent ...

     I have a confession: the boys at Powerline utterly fascinate me.  On paper, they are smart guys: all of them are ivy league educated and all are lawyers with a large national firm.  And I'm sure that, if you needed a top-notch commercial litigator out of Minnesota, one of these guys would be on the list to call.

     But these guys just can't get anything right when it comes to economics.  I mean nothing.  You'd think that after making nothing but erroneous calls for an entire year, they'd call it quits.  But, you'd be wrong.

     The latest missive is from Scott Johnson, titled, "Talkin' Unemployment Blues."  Here's the opening paragraph:

President Obama made an appearance in the White House press room on Friday to take a victory lap over the fall of the official unemployment rate (U-3) to 4.9 percent (video below, about 15 minutes). Is that number for real? Referring to the hell he saw tending to wounded men during the Civil War, Walt Whitman held that “the real war will never get in the books.” By the same token,I wonder if the real unemployment will ever get in the books.

That's right.  At the beginning of his term, when the financial world was literally collapsing around him, Obama secretly fired the entire staff of the BLS so they could cook the statistical books.  That's why the unemployment rate climbed for the first few years of Obama's term, finally hitting 10% in 2010.  Then, the rate moved lower for the remainder of his term.  If he's going to hire people to manipulate the data, you'd think they'd do a better job than a gradual rate of decline.

     But that's not the best part.  Next, Johnson quotes Shadowstats.  Yes, he actually relies on data from Shadowstats.  Johnson even uses a graph from the website that shows a "real" unemployment rate of about 22.5%.  Note to Mr. Johnson: SS was debunked about 8 years ago by James Hamilton (a leading economist, BTW) and the BLS.  In quoting SS, you've basically demonstrated that you have no idea what you're talking about.

     But using SS isn't the best part.  The best part is Johnson links to a report from the St. Louis Federal reserve on the labor force participation rate (LFPR).  Here's that report's conclusion:

The BLS projections show the LFP rate continuing its decline, reaching 62.5 percent in 2020 (using the 2010-2020 medium-term projection). Since 2000, the BLS has projected the long-term decline in the LFP rate, indicating that the high LFP rate that we saw in 2000 might be a figure of the past. In particular, the decline in women's LFP since 1999 is not expected to reverse. The BLS does not expect the large decline in the LFP rates for the youngest group, 16-24-year-olds, to reverse either. To the extent that the decline for the youngest group is due to the time spent at school, it is possible that these workers will show a higher labor force attachment once they are out of school.

In other words, the reports shows that: demographers and statisticians have known about this decline for some time.  They have also studied it and can explain it.  While Johnson thinks the report bolsters his credibility, it only shows that he's clueless.    As in totally clueless.

     Memo to Powerline: econ is not your thing.  It's really not.

 


   

The problem with YoY measures, and a compensating rule of thumb

 - by New Deal democrat

There is a serious problem with simple YoY measures:  they miss turning points.  By the time a YoY measure has changed from positive to negative, or visa versa, the turning point is usually long past.

A good example of this turned up last week in a discussion by Mike Shedlock of jobs reports.  He posted the following graph of the YoY% change in jobs:

and made the following comment:

Jobs are a horribly lagging indicator. Recessions invariably start with the economy adding jobs as noted by the red squares in the above chart....  The peak of the job losses in most recessions is after the recession is over.

Now, I don't mean to pick on Shedlock.  As I have frequently pointed out, even though I disagree with him at least 80% of the time, I appreciate that he always dives into the data, and makes me think.

But as to jobs, the fact is, especially when going into recessions, they don't lag at all (although they have lagged somewhat coming out into the last 3 "jobless recoveries"). The BLS seasonally adjusts the monthly jobs numbers, and when the monthly seasonally adjusted numbers turn from positive to negative, that almost always coincides with the onset of recession.  Because there is a lot of month over month noise, I have averaged the numbers quarterly in the two graphs below covering the last 60 years:

Here is a close-up on the last 2 recessions, with monthly rather than quarterly numbers:

The bottom line is, when we have monthly or quarterly seasonally adjusted data, that is what we should use.  Waiting for a YoY number to turn positive or negative will just cause you to miss the actual turning point.

But frequently there is no choice, because there is no seasonal adjustment.  Most of what I report in my "Weekly Indicators" columns has this issue -- for example, consumer spending measures, the Daily Treasury Report, and rail traffic.

To not miss turning points, I use a rule of thumb:  if a series has improved/declined 50% or more from its best/worst YoY measure (adjusted for inflation if necessary), it has probably made a top/bottom, and turned.  It's not exact, but it is much better than waiting for the YoY number itself to turn. Whether the turning point using this rule of thumb is a little early or a little late depends on whether the turning point is U-ish or V-ish (inverted for tops).  If it is U-ish, the rule of thumb probably leads some.  If V-ish, the rule of thumb probably lags.

For example, the YoY measure of jobs tends to have inverted U-ish tops, and V-ish bottoms.  Applying my rule of thumb to the last 7 recessions, YoY% job growth declined 1/2 off its high 5 times before the actual onset of recession, with a median lead of +3 months.  The 1/2 YoY% of job grain off the bottom lagged each time, with a median lag of -8 months. (When it comes to jobs, the bottom of the V tends to coincide with the month the recession ends!

Thus recently I have been watching a number of indicators that have turned "less bad:"    rail traffic, steel production, and temporary staffing. I am also watching two that have become somewhat "less good:"  tax withholding and gas usage.

In re rail traffic, I also read an article last week that said we were heading into recession because of the big decline in YoY traffic, using this graph:

But note that YoY rail traffic bottomed in early 2009. It was about 1/2 the way back towards positive territory by October 2009.  Waiting for it to turn positive meant you would wait until early 2010 (in real time Shedlock made this exact mistake!).  At its recent worst, rail traffic was off about -20% YoY.  If it declines to less than -10% for about a month, that will strongly suggest that the bottom of the industrial recession has been made.

Hint: if your yield curve model says the US was at high risk of recession in the 1960s and 1990s, your yield curve model is crap

 - by New Deal democrat

I caught this over at Zero Hedge.  Since I can't find the original source online, it apparently started out in a private presentation by Dominc Konstam of Deutsche Bank.

It purports to show a "modified" yield curve that takes into account the fact that Fed funds are stuck at or near the zero lower bound, and this "modifieid" yield curve shows we are at near 50% risk of a recession.  Here's the graph:

Yesiree, it certainly does show that.

It appears to be close to an inverstion of the difference in the 10 year vs. 5 year yield on US treasuries, which is similar and shown in red below:

Here's the problem.  Cast your eye to the left end of the graph, the 1960s.  You know, probably the best economy the US has had since, well, forever?  What does the graph show then?

Apparently, the US was teetering on the edge of recession throughout the entire decade.  Hoocudanode?!?

Next look towards the middle. There is the 1990s tech boom, second only to the 1960s as the best US economy of our lifetimes.  Well, apparently the US was teetering on the edge of recession through that period as well!

So here is a helpful hint.  When your Killer App for Foreceasting Recessions, forecast a recession during the two best economies that the US has had in the last 60 years, your Killer App is Crap.

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Weekly Indicators for February 1 - 5 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at at XE.com .  The big news this week was what happened to the US$.