Weekly Indicators for September 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

Last week I noted some wobbles in the recent paradigm of positive leading indicators, negative coincident indicators.  This week the wobbles continued to fluctuate in various directions.

The road to the next recession has gotten more "long and winding"

 - by New Deal democrat

A few months ago I posted a "road map to the next recession."  So are we closer or futher away?  Hint:  Thank you, Brexit!!!

This post is up at XE.com.

Bonddad's Thursday Linkfest

I'm a financial adviser with Thompson Creek Wealth as well as a tax and business attorney with The Law Office of Hale Stewart.

Fed President Williams on Rate Policy

So, what does this mean for interest rates? In the context of a strong economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later. Let me be clear: In arguing for an increase in interest rates, I’m not trying to stall the economic expansion. It’s just the opposite: My aim is to keep it on a sound footing so it can be sustained for a long time.5

History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession. A gradual process of raising rates reduces the risks of such an outcome. It also allows a smoother, more calibrated process of normalization that gives us space to adjust our responses to any surprise changes in economic conditions. If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver. Not to mention, a sudden reversal of policy could be disruptive and slow the economy in unintended ways.

Beige Book 

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest pace on balance during the reporting period of July through late August. Most Districts reported a "modest" or "moderate" pace of overall growth. However, Kansas City and New York reported no change in activity, and Philadelphia and Richmond noted that, while still expanding, activity slowed from the previous period. Contacts across the twelve Districts generally expect moderate economic growth in coming months. Overall consumer spending was little changed in most Districts, and auto sales declined somewhat but remained at high levels. Tourism activity was flat from the previous report but above year-earlier levels. Sales of nonfinancial services gained further momentum. Manufacturing activity rose slightly in most Districts. Activity in residential real estate markets grew at a moderate pace, but the pace of sales was constrained in a few Districts by shortages of available homes. Commercial real estate activity expanded further. Demand for business and consumer credit varied across Districts but appeared to expand at a moderate pace overall, with stable credit quality. Agricultural conditions were mixed, with price declines largely offsetting growing volumes. Overall demand for energy-related products and services weakened. 

The 5 primary coincident indicators

NYSE and NASDAQ AD Lines are Rising

 EU GDP Steady

Notice the drop in exports and imports over the last 4 quarters.  In contrast, household spending the business investment have been stead for the EU 19.

EU Markets are Improving Relative to the SPYs

U.S. Data Raising Doubts About Rate Hike (Capital Spectator)

The surprisingly sharp drop in yesterday’s release of the ISM Non-Manufacturing Index for August has unleashed new worries that the US economy is weakening as it heads into the final months of 2016. It doesn’t help that the Federal Reserve’s broadly defined Labor Market Conditions Index (LMCI) dipped back into negative territory last month. Neither of these soft numbers present a smoking gun for arguing that the US is slipping into a new recession, but the news raises more doubts about the wisdom of raising interest rates at the Fed’s monetary policy meeting that’s scheduled for Sep. 20-21.

Bonddad's Wednesday Linkfest

I'm a financial adviser with Thompson Creek Wealth as well as a tax and business attorney with The Law Office of Hale Stewart.

ISM Services Drops But is Still Positive

Homebuilders Are Facing a Construction Labor Shortage

Eight years after the housing bust drove an estimated 30 percent of construction workers into new fields, homebuilders across the country are struggling to find workers at all levels of experience, according to the National Association of Homebuilders. The association estimates that there are approximately 200,000 unfilled construction jobs in the U.S. - a jump of 81 percent in the last two years.

The ratio of construction job openings to hiring, as measured by the Department of Labor, is at its highest level since 2007.

"The labor shortage is getting worse as demand is getting stronger," said John Courson, chief executive of the Home Builders Institute, a national nonprofit that trains workers in the construction field.

The impact is two-fold. Without enough workers, residential construction is trailing demand for homes, dampening the overall economy.

And with labor costs rising, homebuilders are building more expensive homes to maintain their margins, which means they are abandoning the starter home market. That has left entry-level homes in tight supply, shutting out may would-be buyers at a time when mortgage rates are near historic lows.

Chart of Total Construction Employees

Chart of New Home Sales

Financials Margins of the 20 Largest Homebuilders by Market Capitalization

Only 2 Mid-Cap Dividend Aristocrats (Mid-Cap Stocks That Have Increased Dividends for 25+ years) Have Outperformed the SPYs over the Last 10 Weeks

Bonddad's Tuesday Linkfest

I'm a financial adviser with Thompson Creek Wealth as well as a tax and business attorney with The Law Office of Hale Stewart.

U.S. Sector Performance Relative to the SPYs

Right now, technology and financials look attractive relative to the SPYs.  Financials are especially attractive due to the high possibility of an upcoming rate hike.

The Financial Sector's Relative Performance

1-Year Cangleglance Charts

My Weekly Columns Are Up at XE

US Equity Week in Review

US Bond Market Week in Review

International Week in Review

Weekly Indicators for August 29 - September 2 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Some wobbles appeared in several previously positive data series.

August Jobs report: another month of later expansion deceleration

- by New Deal democrat

HEADLINES:

• +151,000 jobs added
• U3 unemployment rate unchanged at 4.9%
• U6 underemployment rate unchanged at 9.7%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  down -53,000 from 5.886 million to 5.833 million  
• Part time for economic reasons: up +113,000 from 5.940 million to 6.053 million
• Employment/population ratio ages 25-54: down -0.2% from 78.0% to 77.8% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up +$.04 from $21.60 to $21.64,  up +2.5% 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.)

June was revised down by -21,000, and July was revised up by +20,000, for a net change of -1,000. 

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

• the average manufacturing workweek fell -0.2 from 42.0 to 41.8 hours.  This is one of the 10 components of the LEI, and is a negative.
 
• construction jobs fell by -6,000 YoY construction jobs are up +199,000.  
 
• manufacturing jobs fell by -14,000, and are down -37,000 YoY

• temporary jobs - a leading indicator for jobs overall decreased by -3,100 (this made a peak in December, but had been stabilizing).


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by +130,000 from 2,160,000 to 2.290,000.  The post-recession low was set 1 year ago at 2,095,000.

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

• Overtime was unchanged at 3.3 hours.
• Professional and busines s employment (generally higher- paying jobs) increased by +22,000 and are up 542,000 YoY.


• the index of aggregate hours worked in the economy declined by-0.3  from  113.1 to 112.8 

•  the index of aggregate payrolls fell -0.1 from 163.2 to  163.1. 

Other news included:        

• the alternate jobs number contained  in the more volatile household survey increased by  97,000 jobs.  This represents an increase  of 2,571,000  jobs YoY vs. 2,447,000 in the establishment survey.    
   
• Government jobs rose by +25,000.     

• the overall employment  to  population ratio for all ages 16 and above was unchanged at   59.7%  m/m and is up +0.3% YoY.   
• The  labor force participation rate was unchanged at  62.8% and is up +0.2% YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY

This was a decent report which is positive in most absolute terms, but relatively continues to show late expansion deceleration. Little outside of the headline jobs number was outright positive.  Most of the internals were unchanged or declined.  Of particular note is that the measures of peripheral underemployment -- part time for economic reasons and those outside of the labor force who want a job now -- have barely made any progress this year.  Wage gains are among the best of this cycle, but that is an extremely low bar.

So, no cause for immediate concern, but no reason to think there will be much further improvement either.

From Bonddad

     First, a few points. 

1    1.)   The economy is already near full employment of 5%.  This means we should accept some deceleration in establishment job growth.

2    2.)   Depending on which Fed governor you ask, the economy needs job growth of somewhere between 70,000-150,000 to absorb population growth.  My best estimate is that that figure is actually around 110,000,120,000.

3     

3    3.)   This is a noisy data series, subject to numerous revisions.  For example, this report adjusts the previous 2 reports up ~20,000 and down ~20,000.  While we should keep track of the monthly report because the market does, we always need to remember there are issues with month data collection and estimates that are corrected throughout time.

     This month, total jobs decreased 99,000.  Goods producing jobs declined 35,000, due to drops in construction and manufacturing hiring.  Service producing jobs declined 64,000 thanks to a fall in professional, leisure/hospitality and health care hiring. 

     While hourly earnings increased 3 cents/hour, weekly hours worked decreased .1, so average weekly earnings were $1.54 lower.

     Finally, this isn’t anywhere weak enough to push the Fed away from a rate hike. 

An economy in Indian Summer

 - by New Deal democrat

Let me get the bad news out of the way first.  This morning's ISM Manufacturing report was disappointing to say the least.  Not only did the overall number fall below 50, but so did the leading new orders index, for the first time all year:

This mirrors the poorer regional Fed reports we got during August.

Still, it is only one month, and ISM readings between 48 and 50 have generally been consistent with slowdowns, not recessions.

But in general the news in the last few months has been better than in the earlier part of this year,  most notably industrial production which likely bottomed in March:

And here's a graph from Matt Trivisonno that Barry Ritholtz put up this morning of the 90 day average of tax withholding payments YoY:

And here is real personal income and spending:

So the dominant coincident indicators of the economy have all shown improvement in the last few months. 

I think the best paradigm for this improvement is compare it with the nice warm autumn days of Indian Summer.  The real summer has passed, and winter is still a ways off, but this is a nice episode.

This was brought to mind by a post I read from Lee Adler of the Wall Street Examiner.  Adler's headlines are typically Doomish, but he tracks real indicators, doesn't cherry pick which onces get attention,  and lets the data speak, even when it contradicts his narrative.  So this was a graph he put up a few days ago comparing real retail sales YoY and real personal consumption expentitures:

Note that for the first few years of this expansion, YoY retail sales were higher than PCE's.  This reversed about 18 months ago.  This is a typical mid-cycle reversal that I have previously pointed out has been a consistent pattern for over 50 years.

The index of leading indicators turned flat in July 2015, and didn't really recover until April of this year:

But the US$ has a history of being a leading indicator as well, and it probably has more relevance as the US economy becomes more globally enmeshed.  So here is what the monthly change, inverted, of the US$ look like, inverted so that strength in the dollar means a drag on the economy:

The dollar drags down the LEI from summer 2014 through January of this year.  If we assign a -.1% contribution to the LEI for every 1% increase in the US$, it makes the downturn in late 2015 through January of this year more intense, and begins the abatement in February -- on time to start showing improvement by now.

So while this morning's ISM report wasn't so hot, I expect the generally positive and improving news to continue for the remainder of this year -- i.e., a period of late cycle Indian Summer.

Bonddad's Thursday Linkfest

I'm a financial adviser with Thompson Creek Wealth as well as a tax and business attorney with The Law Office of Hale Stewart.

Charts of the Pound/Dollar and Pound/Euro

UK PMI Recovers From Post-Brexit Drop

At 53.3 in August, the seasonally adjusted Markit/CIPS Purchasing Managers’ Index(PMI) recovered sharply from the 41-month low of 48.3 posted in July following the EU referendum. 

The month-on-month increase in the level of the headline PMI (5.0 points) was the joint-greatest in the near 25-year survey history. The gains in the indices tracking output and new orders were similarly among the steepest on record. 

Japanese Consumer Spending is Weak

5-Year Chart of Y/Y Change in Retail Sales

1-Year Chart of Y/Y Change in Retail Sales

Overall Household Spending

Brazil Impeaches Roussoff 

Brazil’s senate voted overwhelmingly on Wednesday to impeach President Dilma Rousseff in a historic decision that ends nearly 14 years of rule by her leftwing Workers’ Party in Latin America’s largest country. 

Fireworks were heard in São Paulo and senators who voted to remove Ms Rousseff broke out into the national anthem after a fiery final session in which the opposing sides denounced each other as “scoundrels”. 

Of the 81-seat senate, 61 voted in favour of impeachment and 20 against. 

The ouster of the former Marxist guerrilla for manipulating the budget thrusts her replacement, interim president Michel Temer, into the spotlight at a time when the country is suffering what is expected to be its worst recession in over a century. 

1-Year Chart of the Brazil ETF

Justice Department Sues to Stop Deere From Buying Monsanto Division

US antitrust regulators filed suit on Wednesday to block Deere & Co., the US farm equipment maker, from buying Monsanto’s precision planting unit.

If the tie-up were completed, “Deere would control nearly every method through which American farmers can acquire effective high-speed precision planting systems”, the US Department of Justice said in a filing in federal court in Chicago.

1-Year Chart on Monsanto

1-year Charte of Deere

Bonddad's Wednesday Linkfest

Important Charts


Semi-Conductor ETF Powering Higher

Software ETF Powering Higher

Spain is Still Trying to Form a Government

Weekly Chart of the Spain ETF

UK Mortgages at 18- Month Low

Weekly Chart of the UK ETF

EU Industrial Confidence Down Sharply

The marked decrease in industry confidence (-1.8) was caused by the sharpest deterioration in managers' assessments of the current level of overall order books since February 2009. The appraisals of the other two components were either unchanged (stocks of finished products) or slightly worse (production expectations). In line with the pessimistic views on overall order books, the assessments of export order books and past production (not included in the confidence indicator) deteriorated as much as last time in October 2012 and July 2011, respectively.

Chart of EU Industrial Confidence

1-Year Chart of the EU ETF

Bonddad's Tuesday Linkfest

Financial Sector Is Improving Thanks to Rate Hike Talk

Financial Sector is Strengthening Relative to the SPYs

The XLF is Near New Highs

The KIEs are Making New Highs 

The XLF/SPY Ratio is Low

Personal Income and Spending Up

Personal income increased $71.6 billion (0.4 percent) in July according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $60.1 billion (0.4 percent) and personal consumption expenditures (PCE) increased $42.0 billion (0.3 percent).

Real DPI increased 0.4 percent in July and Real PCE increased 0.3 percent. The PCE price index was unchanged from June. Excluding food and energy, the PCE price index increased 0.1 percent in July.

Chart of the Last 7 Months of Changes

1-Year Chart of the Retail Sector ETF

1-Year Chart of the XLPs

1-Year Chart of the XLYs

The Fed Sure Would Like Some Help from Fiscal Policy (Yellen)

Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy.  For example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions. As always, it would be important to ensure that any fiscal policy changes did not compromise long-run fiscal sustainability.

Chart of Current Federal Expenditures

Chart of the YOY Percentage Change in Federal Expenditures