December jobs report: late cycle mediocre growth reasserts itself

- by New Deal democrat

HEADLINES:

• +143,000 jobs added
• U3 unemployment rate unchanged at 4.1%
• U6 underemployment rate rose  +0.1% from 8.0% to 8.1%

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

Wages and participation rates

• Not in Labor Force, but Want a Job Now: rose +43,000 from 5.265 million to 5.308 million   
• Part time for economic reasons: rose +64,000 from 4.851 million to 4.915 million
• Employment/population ratio ages 25-54: rose +0.1% from 79.0% to 79.1%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.0.07 from  $22.23 to $22.30, 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 +25,000 for an average of  +17,500 a month vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
• Coal mining jobs fell -400 for an average of -63 a month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

October was revised downward by -33,000. November was revised upward by +24,000, for a net change of -9,000.   

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 fell -0.1 hour from 40.9 hours to 40.8 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by +30,000. YoY construction jobs are up +210,000.  

• temporary jobs increased by +7,000. 
 
• the number of people unemployed for 5 weeks or less decreased by -18,000 from 2,253,000 to 2,235,000.  The post-recession low was set over two years ago at 2,095,000.

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

• Overtime was unchanged at 3.5 hours.
• Professional and business employment (generally higher- paying jobs) increased by  +19,000 and  is up +488,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.1%  from 115.9 to  116.0.

•  the index of aggregate payrolls rose by  0.7%  from 172.2 to 172.9.     

Other news included:           

• the  alternate jobs number contained  in the more volatile household survey increased by  +104,000  jobs.  This represents an increase of 1,267,000 jobs YoY vs. 2,055,000 in the establishment survey.      
     
• Government jobs rose by 2,000.       

• the overall  employment to  population ratio for all ages 16 and up was unchanged at 60.1 m/m  and is up + 0.3% YoY.         
• The  labor force participation  rate was unchanged m/m and is also unchanged YoY at 62.7%   

 SUMMARY   

This was a mediocre but not bad report.  There was growth in almost all sectors of employment. Participation measures were positive. Aggregate payrolls and hours increased. 

But there were concerning signs of late cycle deceleration as well. The underemployment rate increased for the second month in a row, and the unemployment rate is up from two months ago. Involuntary part-time employment and those outside of the workforce who want a job now both increased. And wage growth is actually declining.

Bottom line: after several months of post-hurricane bounces, we are back to a late cycle dynamic.

My forecast for H1 2018

 - by New Deal democrat

The first part of my two-part forecast for 2018 is up at XE.com.

What's Up With the Asset Backed and Commercial Paper Market?

Above are three charts for the short-term asset backed market.  Over the last month, we've seen increased spreads.  The overnight market (top chart) is a bit higher.  But the 30-day spread (middle chart) and 90-day spread (bottom chart) have both spiked pretty sharply.  

We're also seeing increased spreads in the short-term commercial paper market.

Commodities and Inflation

Above is a group of charts that track the major commodity ETFs.  There are two groups of prices that could cause inflation to move higher.

1.) Energy prices (second from the left, second row from the top): oil obviously plays into this (upper left hand corner), but so does the price of gas (left chart on the very bottom).

2.) Industrial metals (upper right-hand corner) and copper (third from the top left):  The industrial metals ETF largely tracks copper, which is in the middle of a rally.  But other industrial metals are also increasing, such as palladium.

Is this enough to spur prices higher?  Probably now.  Energy prices only account for about 7% of the overall CPI calculation.  Food prices are responsible for approximatley 13% of CPI, and those are all decreasing.

The Oil Chart is Setting Up Very Bullishly To Start the Year

Oil is looking very bullish right now.

On the daily chart (top chart), prices are in a multi-month uptrend.  They recently consolidated gains in a triangle pattern and are now at a 1-year high.  The moving averages are setting up in a bullish manner: they're all increasing, the shorter EMAs are above the longer EMAs and prices are above the EMAs.  The MACD has plenty up upside potential at current levels.

The weekly chart (bottom chart) is also very bullish.  Prices consolidated around the 200-week EMA and have since moved higher.  The MACD is also rising and has plenty of upside room. 

When a security sets up in bullishly in several time frames, the odds of a bullish advance increase.  

This is one of the charts I recently said was key to 2018.  

My Last Posts of the Year Are Up at XE

International Week in Review

Bond Market Week in Review

Weekly Indicators for year end 2017 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.  The year 2017 is ending in a very positive fashion.

The Doomers have been almost completely silent.  This means I must begin to compile a list of things that I can start to worry about ....

Happy New Year!

2018 Looks Like a Solid Economic Year

This is over at xe.com

In which I mark my forecast for 2017 to market

 - by New Deal democrat

At the beginning of each year, I fearlessly forecast the economy over the ensuing 12 months.

So, how did I do one year ago with my forecasts for the first and second half of 2017?

Bottom line: not too shabby.  This post is up over at XE.com.

John Hinderaker and Steven Hayward Are Actually Becoming More Economically Incompetent With Age

First of all, let's all remember that Powerline has the worst record when it comes to discussing economics.  As I pointed out several years ago, they spent an entire year getting literally everything wrong. 

So, they're now at it again over the latest changes to the tax code from the Republicans in Congress.  There's just one problem: there is actually little correlation between tax rates and growth.  "But the economy grew after the Reagan tax cuts!" you respond.  Actually, cutting interest rates (again, econ 101 here) had a little more to do with that than you think.  And then there's this:

This chart that shows the highest marginal tax rate (in blue, left scale) and the Y/Y percentage change in GDP growth (in red, right scale).  Notice that the red peaks are in fact higher when taxes are higher, completely contradicting Powerline's argument.

     And then there's this little scatter plot from Jared Bernstein (someone who has actually studied economics):

There is no statistical correlation between tax rates and per capita GDP growth.

Now, this analysis involves data, facts, and math -- three areas where all the Powerline contributors are deficient.  Also remember they're political sycophants -- if the Republican party said, "The sky is now pink," all the guys at Powerline would dutifully write, "The sky is pink."  In other words, it will go over their heads.  And even if they (or their readers) could understand it, they wouldn't listen because it runs against Republican orthodoxy.  

But for those of us who still use data, facts, and statistical analysis, it should be helpful.

Five graphs for 2017:final 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 in 2018. Now that the year is ending, how did they turn out?

#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?

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 then, with the exception of a brief spike after the Texas hurricane, they retreated. They are only a little higher YoY now:

There's no pressure on customer's wallets at all from gas prices.

#4 The US$

Another potential pressure point on the economy in 2015 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 the data has calmed down again, and indeed gone the other way:

#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?

The slowdown duly appeared after the first couple of months of 2017, and continued through September. In the last two months, housing has increased strongly.  This hasn't quite filtered through to 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. so we are probably at about peak impact now.  This isn't going to roll over either.

#2 The Fed Funds  rate vs. consumer inflation

If consumer inflation rose past the magic 2% Fed target, would the Fed chase it?  Apparently it didn't matter. Inflation briefly did spike close to 3% YoY due to the increase in gas prices early this year, and the Fed duly hiked.  But it hiked again even after consumer inflation fell back down under 2%, which increasingly looks like a real ceiling in the Fed's calculations:

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 came  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. The below graph shows the last 20 years::

I would expect to see both sales and wages stall out before the onset of the next recession. Wage growth has weakened in recent months, and wage growth is now barely above zero. Meanwhile consumer spending has increased YoY, as the personal savings rate has decreased by about 1% in the past year.  While consumers are incresingly vulnerable to any inflationary shock, none has happened yet. 

This  has been "the little expansion that could," dodging bullet after bullet in the 8 1/2 years since it started.  If it continues another 15 months or so, it will become the longest expansion in history. None of the potential concerns from 12 months ago have come to fruition.

Next week we'll start looking at five noteworthy graphs for 2018.

My Columns Are Up at XE.com

Bond market year in review

The US economy ends the year on a high note

Weekly Indicators for December 18 - 22 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

There is what passes for turmoil in my dry and nerdy world among the long leading indicators.

Personal spending and new home sales: restrain your enthusiasm!

 - by New Deal democrat

We got the last two significant data points of the year this morning: personal spending and new home sales.  Both rose significantly. BUT there are big drawbacks to each.

First of all, take a look at the personal savings rate:

It just made a new low, at 2.9%, for this expansion.  On the one hand, this is a concrete measure of consumer confidence, in that consumers are comfortable spending more of their income. But at the same time, a big decrease in the savings rate, such as we have had over the last 16 months, tends to happen later in expansions, and makes consumers more vulnerable to any inflationary shock.

Similarly, new home sales had a big +17.5% monthly jump in November.  Here's what the data for both new and existing home sales looks like (note FRED hasn't updated with this morning's number yet):

BUT... new home sales are one of the most drastically revised of all numbers.  And the big jump to 685,000 in October was revised all the way down to 624,000! Meaning that October did not set a new expansion high after all.

I suspect a similar revision is in store for November.  Here's why: take a look at the chart below showing new home sales broken down by region:

Look at the huge, ~50,000 jumps for the South and the West.  The South might make sense if it is still a post-hurricanes rebound.  But does anyone seriously think there was a 30% jump in a single month in the West?!? So I strongly suspect we're going to get another big downward revision next month.

Next week I'll post a final update on my "Five graphs for 2017" along with a review of the 2017 forecast I made one year ago. After that, in the new year, I'll consider whether or not the US economy is actually entering a Boom.  See you then!

The bond yield conundrum: 100 years of spreads

 - by New Deal democrat

As I mentioned the other day, we have data going back nearly 100 years on the relationships between short and long rates, and between corporate bonds and treasuries. I'm looking at this because the yield curve never inverted between 1932 and 1954, during which time there were 5 recessions, one of which (1938) was severe.

Last time I showed you the data since 1980 when the disinflationary trend started, so now let's look at the last deflationary period of the 1920s and 1930s, and the inflationary period from the end of World War 2 to 1980.

Let's start with the deflationary 1920s and 1930s:

The US Treasury bond trend looks very similar to the last decade. Over a 20 year period, yields fell gradually from 4% to 2%, with barely a blip during either of the two severe recessions during that period.  Meanwhile BAA corporate yields were much more volatile, but gave little warning of the 1938 recession, and none at all in 1926.

Here's what the spread between the two looked like, compared with the NY Fed's discount rate. Note that prior to 1934, the regional Feds set their own rates. After that, the NY Fed rate and the national rate were identical:

Discount rates were raised, ultimately sharply, in the late 1920s, but were completely flat prior to the deep 1938 recession. "Real" rates were positive only because the spread declined. Further, the spread between corporates and Treasuries gave only a few months' warning prior to both severe recessions.

Now let's look at each decade separately from the end of WW2 to 1980:

With the exception of the first half of the 1960s, there is a rising trend throughout this era, with sharper rises in the years just before recessions.

Now here are spreads and the Fed funds rate (overlaid with the NY Fed discount rate in the 1950s):

This is the classic postwar Fed, raising rates significantly as the economy exhibits inflation, and lowering them as the recession takes hold.  Meanwhile the spread between corporates and Treasuries gives us much more notice, making a bottom in roughly the mid-part of expansions or even earlier, with the sole exception of 1953.

Looking back over 100 years of data, we see that usually (with the  pointed exception of 1938) the Fed is raising rates, by a smaller amount in deflationary environments, and a larger amount during inflationary environments.  In fact, the information is more useful if we look at the "percent of a percent," e.g., an increase from 1% to 2% is a 100% increase:

Further, during deflationary environments, waiting for an increase in spreads gives us much less notice of an oncoming recession, and even then the increase is well within the range of noise.

Well, we certainly have the Fed raising rates now, and as a "percent of a percent" at the highest rates ever, but the spread is close to all time lows.

What we still want to take a look at is real, inflation-adjusted rates.  That's next.

Why Would Anybody Invest When Capacity Utilization is This Low?

A central selling point of the tax bill is that it will encourage investment.  But that assumes that high tax rates were the primary reason why business wasn't investing.  Instead, the data says business investment is weak because the U.S. has a ton of spare capacity.

First, let's look total capacity utilization:

It has peaked at lower levels in each of the last three expansions.

Let's break the data down into durable and non-durable CU:

Both categories of production have ample spare capacity, with non-durable production having greater capacity.

Finally, let's look at crude, intermediate and final stages of production:

All three have plenty of spare capacity to bring online if needed.  

So, will we see a huge wave of investment as a result of the changed tax bill?  The data says no.

How interest rates and the demographic tailwind ended the housing slowdown of 2017

 - by New Deal democrat

Yesterday's report on housing permits and starts confirms that the housing slowdown of 2017 is over.

Based on the last five years, I can make a pretty decent estimate of the effects of the demographic tailwind of Millennials reaching house-buying age.

It's bigger than I thought! This post is up at XE.com.

Five Key Graphs for 2018

This is up over at XE.com

The bond yield conundrum revisited: narrowing corporate spreads vs. a flattening Treasury yield curve

 - by New Deal democrat

Two introductory notes: first of all, next week is the last week of the year including the Christmas holiday, and there will be almost no economic data.  So, light posting, probably including a final update of my "Five graphs for 2017" as well as marking my 2017 forecast to market over at XE.com.

Secondly, in the coming weeks, I anticipate having much to say about the bond market, as I have done a great deal of examining its signals in the background. This is because, while a yield curve inversion has always been bad news, in times low very low interest rates, like the 1930s through mid-1950s, recessions including at least one very bad one (1938) have occurred without an inversion ever occurring.

Turning to my focus today, in my most recent "Weekly Indicators" column, I noted that the crosscurrents in bond yields. BAA  corporate bond yields, but not AAA rated yields, made a new 12 month low, and were just 0.02% above their 50 year lows from July 2016 -- a very bullish sign.  Meanwhile longer term US Treasury bonds have been meandering generally sideways for the last year. This has driven the spread between Treasuries and BAA corporate bonds to a new expansion low.

All of this is against a backdrop of a tightening, but not inverted, yield curve.

This is a very curious set of circumstances, so I went looking to see if it was unique, or something that had happened before. The bottom line is that it has not been unique, although the iterations, over nearly 100 years of data (!) have not been uniform.

On a broader scale, there have been a number of bond market markers that don't include an inverted yield curve, that have typically foreshadowed an economic downturn. Those will be explored in coming weeks.

But on the narrow issue, let me begin by comparing the spread between the more sensitive BAA corporate bonds and 10 year Treasuries, going back 30+ years (blue), and comparing that with the Fed funds rate (red):

Here is the same graph for the entirety of the 1980s:

In general the spread between corporates and Treasuries has declined as the economy strengthens, and risen as it decelerates or weakens. Meanwhile, at some point if the economy is strong enough, the Fed begins a tightening  cycle. In each of the last 4 expansions, the bottom in the yield spread has occurred during the period that the Fed is tightening: 1989, 1994, 1999 (secondarily), early 2005, and now.

When spreads turned higher from these lows, that was a clear sign that the Fed had weakened the economy -- although, in the case of 1994, there was a "soft landing" in 1995 followed by a boom.

Here are breakout graphs for each of the last 4 expansions, comparing BAA yields (blue) , AAA
yields (red), and Treasury yields (green).

Note that the current situation is just like that of early 2005. Then, as now, BAA but not AAA bonds made a new low, in the face of flattish Treasury yields (this was part of Greenspan's "conundrum").

In the two earlier expansions of the 1980s and 1990s, the narrowing of spreads was accomplished via a period of flat Treasury yields (1986, early 1998) with declining corporate bond yields.

I strongly suspect that the current move is due to a belief that corporate profits are about to improve substantially in the wake of the GOP tax bill, particularly aiding less creditworthy companies. I also suspect that this may be a "buy the rumor, sell the news" type of move, where spreads do not further decline significantly, once the Act actually takes effect.

In other words, the decline in BAA yields, and the according decline in spreads is an unequivocal good sign for the present and the short term future as long as one year out. It is only a harbinger of longer term trouble if BAA yields, and spreads, begin to turn back up.

But does this hold up upon examination of earlier economic cycles? As I pointed out at the outset, we have decent data going back all the way to the 1920s.  So I'll look at that next.

Monday Morning Bond Market Round-Up

The Baa-10-year treasury spread (top chart) is at a 10-year low.  This is a leading indicator.  The AAA-10-year spread (bottom chart) is also a 10-year low.  This chart shows that the market is still searching for yield.

After spiking earlier this year, CCC yields (top chart) have come in 45 basis points.  This was a potential problem sign as this section of the bond market is the first to widen when trouble emerges.  But the problem never cascaded out into the BBB market.

The 30-day asset-backed commercial paper spread (top chart) that I wrote about on Friday has come back in.    But it's still in the middle of a short-term uptrend as is the 90-day market (bottom chart).