Weekly Indicators for July 10 - 14 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com

One week ago I downgraded my longer term forecast. That remains this week.

Real retail sales concerning while industrial production shines

 - by New Deal democrat

Real retail sales is one of my favorite data series, because it tells us so much about the consumer economy.  This morning's report was no exception.

To begin with, the unusual early decline in gas prices brought down CPI to unchanged. On a YoY basis, CPI is now only up 1.7%:

This is a backdoor positive for real wages. with nominal growth in the 2.3%-2.5% range, the decline in inflation means more spending power for consumers.

But since nominal retail sales declined -0.2%, this means that real retail sales declined as well:

Next, real retail sales per capita is a medium to long leading indicator, and here the story is, a plateau since last December:

This indicator has to be rated as no better than a neutral as of now. That is clearer when we look YoY:

While we've had pauses in real retail sales growth before in this expansion, this time the pause coincides with the weakening or turning outright negative of several other of the long leading indicators. It wouldn't take much more weakening of this metric to turn it, too, into a negative.

If retail sales were poor, at least the Doomer mantra that "hard" data hasn't confirmed "soft" data will be a little more quiet today, as industrial production rose +0.4%, and the manufacturing component rose +0.2%:

Bottom line: mixed news for the nowcast, with a little more cause for concern in the long term forecast.

An important deterioration in the long leading indicators

 - by New Deal democrat

The failure of interest rates to make a new low in the llast 12 months has important ramifications.

This post is up at XE.com.

Trump: the endgame

 - by New Deal democrat

There was some economic news last week which is important for the long term, and I'll try to post about it later today or tomorrow, but in the meantime ...

I'm as interested in the latest Trump-Russia tidbit as the next person, but really, don't we all already know the endgame? 

Remember during the campaign, no matter what devastating gaffes Trump made, he always rebounded into the low 40%'s? Well, about the same thing has been true for the last 5 months.  No matter what the news, Trump's approval rating is 38% +/-3%:

So here, as a public service, to save you all the sturm und drang of the next 3 years, I present you in narrative form with the endgame:

PUTIN: Do as I say or else!

TRUMP: So what? I'm the President!

PUTIN: If you don't carry out what I want, I will release my most devastating information on you.

TRUMP: Don't you know I always welch on the last payment?

PUTIN: [releases devastating information]

DEMOCRATIC ESTABLISHMENT: We're horrified! So horrified that now we can run on this, and we don't have to offer an actual program to help people.

PRESS [to GOP Congress]: Are you going to impeach Trump?

GOP CONGRESS: ...   ...  ...

GOP BASE: Attaboy!  What a guy!

FOX NEWS: It's Clinton and Obama's fault!

GOP CONGRESS: We think Trump is doing a wonderful job.

PUTIN: Wtf?!?

TRUMP: See, I told you so.

RYAN AND MCCONNELL: Hey, Donald, while everyone else is busy, here's some byootifull legislation for you to sign: 

repealing Obamacare

repealing Medicaid

repealing the Voting Rights Act

cutting Medicare

repealing the Civil Rights Act

cutting Social Security

repealing the 14th and 15th Amendments, and what the heck, everything after that.

RYAN: He can't repeal Constitutional Amendments!

MCCONNELL: Shaddup! He doesn't know that. Besides, now the Kennedy is retiring, we're going to have 5 Justices on the Supreme Court who will do whatever we want.

A reminder: the econometric election models actually performed very well in 2016, forecasting a very tight race, with most models showing Clinton winning *the popular vote* by a slim margin.

Don't forget that Trump actually came right out and invited the Russian government to collude with him to defeat Clinton. Why should he care if the collusion turns out to have actually happened? The most likely case is that Trump has been neck deep funnelling Russian money to his "Investments,"whether or not it was lawful or merely unsavory. His base does not care.   For Putin, he is the Mother of All Useful Idiots, nothing more.

What will defeat Trump and the GOP is either an unsuccessful major war, like Korea or Vietnam, and/or an economic downturn that hurts their base.  That's the bottom line. The rest is opera.

JOLTS and Labor Market Conditions Index: for once, a good report

 - by New Deal democrat

Usually I am the lone Debbie Downer when it comes to the JOLTS report, mainly because I think there is way too much attention paid to the "soft" openings data vs. the "hard" hires and quits numbers.

Well, in this morning's report on May, it was the "hard" data that was better.

As I usually do, first here are openings (blue) vs. hires (red):

Openings declined to back within their 2 year range, while hires rose to the top of their 2 yeear range.

On a YoY basis, both were positive, although not by much:

The best news of all was quits, which made a new record high:

Yesterday's Labor Market Conditions Index for May wasn't too shabby either:

While it wasn't as high as the last few months, it remained positive, and since it shows promise as a long leading indicator, that's a good thing.

My overall take remains that we are late in the cycle, but the coincident data is still pretty positive, and there is no imminent problem in sight.

A thought for Sunday: Trump voters and the "peasant mentality"

 - by New Deal democrat

I am currently reading a comprehensive tome on 19th century European history, "The Pursuit of Power," by Richard J. Evans.

One episode that made a big impression on me was the decision by Otto von Bismarck (no conservative he) upon the establishment of the German Confederation, to eschew property qualifications for the franchise for the Reichstag and embrace universal male suffrage (p. 257).  Why? In so doing, he "bypass[ed] the liberal middle classes to appeal to what he assumed were the loyal and conservative masses in the countryside."

I was reminded of Bismarck's shrewd insight upon reading a post by Dietrich Vollrath:  "The return of the peasant mentality."

Discussing the outcomes of recent research, Vollrath writes:

[W[hen people move from rural to urban, or urban to rural places in these countries, do their wages change?.... 
The combination of facts tells you that there is selection out of rural/agricultural work and into urban/non-agricultural work for people with lots of human capital. There is not some distortion that prevents rural people from moving to higher wage positions, apparently, its just that all the really skilled or smart people move off the farm.

.... 

What’s really interesting is that this pattern shows up in the Raven’s Z-scores .... a crude, but effective, proxy for IQ....  So it’s not just that people who are lucky enough to get an education in an urban area stay there, and people unlucky enough to miss out on schooling in rural areas stay there. People with better measures of inherent smarts tend to end up in the city, or are in cities to begin with. 

Perhaps we should take seriously the idea that peasants are really different, not just in their constraints (which the development literature ..., but in their underlying preferences as well ....

One sees the pattern repeating over and over, across all sorts of societies, from the Spanish Civil War of 1937 to most of Mexican history. A decade or so I read that many of the Chinese immigrants to the U.S. in the late 20th century were Fujianese.  What distinguished the leavers from the stayers?  More than anything else, it was the propensity for risk-taking.

If we think in terms of the Biblical Parable of the Talents,  the risk-taking servants who invested their two and three Talents tend to leave economic backwaters and gravitate to high-growth areas, while the fearful and conservative servant who buried his one Talent tends to stay behind in the economic backwaters.

Which brings me to the small urban and rural Trump voter in the U.S. What distinguishes those people who have left the Rust Belt for greener economic climes vs. the stayers?  Maybe, like the Fujianese, and like the populations that Vollrath's post describes, the biggest distinguishing factor is the willingness to take a risk vs. social conservatism.

That the stayers might have an "underlying preference" for things staying the same as always  can explain a lot about the phenomenon of the right-wing populist voter in the U.S.   They don't want globalism, they don't want change, and they don't want retraining either.  They want the kind of jobs, and the kind of society that they remember from their youths.

Weekly Indicators for July 3 - 7 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This week, for this first time in years, there was a change in the longer term outlook.

June jobs report: great headline, but once again where are the wages?!?

- by New Deal democrat

HEADLINES:

• +222,000 jobs added
• U3 unemployment rate rose +0.1% from 4.3% to 4.4%
• U6 underemployment rate rose +0.2% from 8.4% to 8.6%

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 -130,000 from 5.561 million to 5.431 million   
• Part time for economic reasons: up +107,000 from 5.219 million to 5.326 million
• Employment/population ratio ages 25-54: up +0.1% from 78.4% to 78.5%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 from $21.99,  to $22.03, up +2.3% 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.)

Holding Trump accountable on manufacturing and mining jobs
 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise? 

• Manufacturing jobs rose by +1,000 for an average of +2000 vs. the last severn years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
• Coal mining jobs were unchanged for an average of +200 vs. the last severn years of Obama's presidency in which an average of -300 jobs were lost each month

April was revised upward by +33,000. May was also revised upward by +14,000, for a net change of +47,000.  

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

• the average manufacturing workweek rose +9.1 hour from 40.7 hours to 40.8 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by +16,000. YoY construction jobs are up +206,000.  

• temporary jobs increased by +13,400.


• the number of people unemployed for 5 weeks or less increased by +151,000 from 2,154,000 to 2,305,000.  The post-recession low was set 18 months ago at 2,095,000.

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

• Overtime was unchanged at 3.3 hours.
• Professional and business employment (generally higher- paying jobs) increased by +35,000 and is up +624,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.5 from 106.9 to 107.4  

•  the index of aggregate payrolls rose by +0.8 from 134.0 to 134.8.   

Other news included:          

• the alternate jobs number contained  in the more volatile household survey increased by   +190,000   jobs.  This represents an increase of 1,560,000  jobs YoY vs. 2,238,000 in the establishment survey.    
    
• Government jobs rose by +35,000 .     

• the overall employment to population ratio for all ages 16 and up rose +0.1% from  60.0% to  60.1 m/m  and is  up +0.5%  YoY.     
• The  labor force participation rate rose +0.1%  m/m and is up +0.1% YoY from 62.7% to 62.8%.      

 SUMMARY  

The best thing about this report was the headline number of jobs added, plus the big positive revisions to April and May, which brought the average of the last three months to +191,000.  Most of the leading internals were also positive, suggesting the positive headline news should continue over the next six months. Those not in the labor force but who want a job now also declined to a post-recession low (but still elevated by nearly 1 million above the late 1990s boom.)

While the unemployment and underemployment rates went up, this was balanced by the increase in labor force participation rate. 

One weak spot was that involuntary part-time employment increased slightly.  Also, politically, Trump  has so far actually *underperformed* Obama in the net for manufacturing and coal mining jobs.

But the one big negative -- broken record here -- was wages, which have now grown only +2.3% YoY for nonsupervisory workers.  So while this a a very good late cycle report, my fears are increasing about how bad it will be for workers when the next recession does hit.

La araña

 - by New Deal democrat

Just a little aside....

Here is a photo of the dessert I got yesterday at my favorite local authentic Mexican restaurant:

It is flan with whipped cream, a couple of blackberries, and shaped cinnamon sticks.  I had to laugh when the waiter delivered it.

And yes, "la araña" in Spanish means "the spider."

Reality begins to sink in for GOPer economic confidence

 - by New Deal democrat

While we are waiting for tomorrow's employment report, here's a little something to chew on.

In the immediate aftermath of the Presidential election -- as in, by the end of that week -- Gallup's measure of economic confidence soared, from its 2016 average of roughly -10 to a positive number and to nearly +10 by the end of November:

In fact, while the confidence of Democrats sank, the confidence of GOPers skyrocketed even more.

Since I have very little faith in the GOP agenda to deliver any uptick in growth, I have been watching and waiting for this confidence to ebb.  It did somewhat beginning in March, but never to the point of coming close to that in the final year of Obama's term. (For the doubters, consider George W. Bush's economic policies.  Despite being the most right-wing since the 1950s, we had the weakest post-War jobs and wage growth on record, and a weak GDP to boot. Where was the trickle-down?)

Until last week.  Last week Gallup's economic confidence index fell to -7:

As shown in the graph, it has since rebounded.  But it appears that after half a year of accomplishing absolutely nothing legislatively, the reality that the economy really hasn't changed at all -- in fact it may be waning just a bit -- is beginning to sink in.

While houses and cars slow down, manufacturing picks up

 - by New Deal democrat

There were conflicting reports on the economy Monday, in the form of June vehicle sales vs. June manufacturing.

This post is up at XE.com.

Happy 8th Independence Day, economic expansion!

 - by New Deal democrat

In lieu of a more traditional Independance Day post, in view of the fact that the economic expansion turned 8 years old this week, I thought I would take a moment to highlight how far we have come.  Because as mediocre as some things are, we have come a long, long way since the dark days of June 30, 2009.

Unemployment has fallen from a high of 10.0 to 4.2%, and underemployment has fallen from 17.1% to 8.4%:

Over 16 million jobs have been added since the bottom in February 2010:

As of May, real median household income just made a  new high (h/t Doug Short):

Since this statistic is skewed by the increasing share of households headed by retirees, the odds are pretty good that working age real median household income is actually doing a little better.

In real terms, the amount of wages paid out to regular nonsupervisory workers has increased by about 22%:

Finallly, real GDP per capita has increased by 11%:

None of this is stellar. In particular, I wish that wage growth were more stout.

But when you compare where we were then with where we are now, there's no contest. So Happy 4th of July, economy!

A prescient forecast by the Senior Loan Officer Survey

 - by New Deal democrat

There has been a spate of Doomish commentary recently (for example, here) claiming that the stalling of commericial and industrial loan growth means that we are heading into, if not already in, a recession.

Aside from the fact that typically in the past, YoY commerical and industrial loan growth has been a lagging rather than leading indicator, bottoming out well after recessions have ended,  over the weekend I was cleaning out some old saved material when I came across the following graph dating from the first quarter of 2015.  The graph compared the percentage of senior loan officers reporting tightening of standards (right scale) for commercial and industrial loans (lagged 6 quarters) to the YoY% change in commercial and industrial loans (left scale):

The relationship forecast that YoY commercial and industrial loans were going to decelerate to about +5% YoY.  I wish I knew whose graph it was, because I would sure like to give them proper kudos! Because that is exactly what has happened since (note that FRED does not permit me to lag one series of data):

Commercial and industrial loans have flatlined, just as forecast by the writer in Q1 2015.

Note, of course that in the last three quarters, the Senior Loan Officers have reported a slight loosening of standards, which suggests that commercial and industrial loans will continue to flatline through about the end of the year, and improve in 2018.

Finally, I have recently noted that the weekly Chicago National Financial Conditions Index does a decent job of forecasting the direction of the Senior Loan Officer Survey itself.  So here is the Chicago NFCI  vs. YoY commercial and industrial loans:

The Chicago weekly survey is forecasting a continued improvement in the Senior Loan Officer Survey when it is reported for Q2 in about a month.

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Weekly Indicators for June 26 - 30 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

The yield curve abruptly steepened, but on the other hand, real money supply decelerated further.

Brexit, one year later: "a fire across the river"

 - by New Deal democrat

I take a one year retrospectivie look at Brexit, and its (lack of) effect on the US economy, over at XE.com.

Five graphs for 2017: mid year update

 - by New Deal democrat

At the beginning of the year, I identified 5 trends that bore particular watching, primarily as potentially setting the stage for a recession next year.  Now that we are halfway through the year, let's take another look at each of them.

#5 Gas Prices

One potential pressure point on the economy was gas prices, which appear to have made a long- bottom in January of 2016. As they began to rise, consumer inflation has increased from non-existent to almost 3%. So the issue was, will they rise even further and drive inflation even higher?

And the answer so far this yeear has been a resounding "No!"  Typically it has taken a 40% YoY increase in gas prices to shock the consumer.  Gas price increases did briefly approach that point early in the year, but since then they have retreated all the way to being negative YoY:

This has actually helped boost real wages, as we will see further below.

#4 The US$

Another potential pressure point on the economy was a big increase in the relative value of the US$, which was part of the shallow industrial recession of 2015.  The $ started to rise again after the November election.  Here too after an initial spike, the data has calmed down again:

#3 Residential construction spending vs. mortgage rates 

Another data point which rose sharply after the November election was interest rates.  Generally speaking, home building changes in the opposite direction of interest rates.  So would the increase in interest rates (e.g., mortgages) cause new residential construction to back off?

Although as I have written in the past several weeks, the slowdown has appeared in permits and housing starts -- and new home sales have turned flat in the last few months, the slowdown hasn't yet filtered through into actual residential construction spending:

Residential contruction spending is a very smooth, un-noisy series, but it does lag permits and starts by a few months,. Note that typically it has taken a big change in mortgage rates about 9 to 12 months to feed through into residential contructioni spending. It hasn't yet this year.

#2 The Fed Funds rate vs. consumer inflation

If consumer inflation rose past the magic 2% Fed target, would the Fed chase it?  The Fed's preferrred measure is personal consumption expenditures, but consumer inflation YoY as of March was up +2.8%, but due to gas prices as discussed above, inflation is now back down under 2%.  Nevertheless the Fed has hiked interest  rates twice:

The yield curve has begun to compress, but it is still positive. Still, it will be difficult to avoid an inversion in interest rates should the Fed stay on its current course with several more hikes.

#1 Real retail sales vs. real average hourly earnings

The final graph comes from my "alternate" recession forecasting model which turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). The long term relationship has been that sales lead jobs, and jobs lead nominal wage increases, but real sales vs. wages are somewhat more nuanced. In the inflationary era, through the early 1990s, YoY wareal wage growth actually slightly led sales. In the deflationary era that dates from the alter 1990s, if anything the two are a mirror image, but in every case but 2001 (where real wage growth just decelerated rather than declined), both have been negative going into recessions:

 Focusing on the last 20 years marking the deflationaary era, at present real retail sales continue to be positive, and with gas prices and overall inflation down, real YoY wages have turned positive again:

I would expect to see both sales and wages stall out before the onset of the next recession.  Neither is presently the case.

This  has been "the little expansion that could."  In its 8 year history, it has dodged all kinds of problems without being derailed.  Like so much before them, the problems from the end of last year have been fading away. Only the problem of the Fed raising rates looks like a serious near-term issue.  

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Weekly Indicators for June 20 - 24 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is Up at XE.com.  No major changes from last week.

New Home Sales stall, but no downturn

 - by New Deal democrat

Well, the May new home sales report is out.  The good news is, it did not confirm last week's negative reports in housing permits and starts.

This post is up at XE.com.