Weekly Indicators for February 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Even with their 10% correction, stock prices melted up so much in the last few months that they have not even made a new three month low. Since that is my predetermined marker -- taking emotion out of the process -- for measuring whether stocks are a near term positive or not, they remain a positive!

Fraying at the edges? *relative* underemployment increases

 - by New Deal democrat

This is a post I've been meaning to put up all week (after all, this week was going to be very slow on data and news, right?).

As the expansion gets more and more mature, the *relative* performance of certain measures of improvement become more interesting.  One of those is the comparison between U3 unemployment, and the broader U6 underemployment measure.

While we only have about 25 years of data, so caution is warranted, generally speaking, during that time as the expansion has improved, an increasing number of the more marginally employable find jobs. As a result, U6 declines faster than U3. Later on, as the expansion begins to wane, U6 underemployment has weakened first:

Another way of looking at this is to subtract the U3 unemployment figure from that of the broader U6 measure:

Note that in both the 1990s and 2000s, this remainder started to rise before U3 itself bottomed.

More important for the present, note that this remainder of U6-U3 has risen slightly in the last 2 months, as the unemployment rate has held steady and the underemployment rate has risen by 0.2%.

Yet another way to look at this is to chart the YoY change in this remainder:

Note the slight weakening in this metric as well.

It might just be noise, but on the other hand it could be an early sign of weakness starting in the job market. If so, that doesn't mean a recession is near, as in the next 3 to 6 months. But it bears continued watching.

Once more into a the market abyss

 - by New Deal democrat

So the stock market is down 10% as of this writing, which takes us all the way back to --- three months ago!

Really? This is what you're worried about?

A little context. Here's a graph of the S&P 500, normed to 100 as of September 1, 2017:

The market went up 16% in 5 months, or +.75% each and every week.  That translates into an annual rate of +48%!  A 48% annual gain coming out of a recession isn't a big deal. Coming 9 years into a bull market, that, dear reader, is a blowoff. 

Even if you figure that corporate profits were going to be up 5% YoY this year, and even if you figure that the recent tax cut for corporations was going to add 10% to that -- well, the market added all of that in already, didn't it?

And now that froth has been poured off.

To reiterate, the vast majority of other leading indicators, both long and short, are inconsistent with a recession starting in the next 3 to six months. Just this week, the Senior Loan Officer Survey, the JOLTS report, and initial jobless claims all pointed to continued expansion. As did last week's ISM manufacturing new orders numbers, as do the regional Fed reports, as do mortgage applications, as do the recent monthly housing reports.

If the vast majority of data says we're not heading into recession, then it is very, very unlikely that this correction is going to turn into something long-lasting.

In the last few days, I've gotten pushback that good leading indicators are bad, because they must be close in time to a bottom. Nonsense! 

Let me introduce you to Lee Adler at the Wall Street Examiner, who wrote:

Record low claims are the patina of policy success ....  These record claims represent a bubble that was born out of and is joined at the hip with the financial engineering bubble that has been metastasizing in the US economy for a generation.

Just one problem: this quote comes from November 2015, when initial jobless claims were averaging 270,000 per week.

See the problem? 

In my opinion, If you are middle or working class, and you have some money in the market via a 401k or similar, and you can't stand a 10% downturn, then you shouldn't be in the market at all, but rather devote that money to a cash-type of portfolio that allows you to sleep at night and not worry about your future.  One rule of thumb I set for myself way back 25 years ago when I first got interested in this stuff, is what I called "the Turtle Method," as in turtle vs. hare. That rule of thumb was that, for every month's expenses I had saved, I could invest 1% of my assets. So if I had 10 months of savings, I could invest 10% of my total assets.  That way I could sleep at night.

Bottom line: there are a lot of major problems in this country right now. How the economy is doing isn't one of them, and that is very unlikely to change in the next 3-6 months.

Credit got looser in Q4 2017

 - by New Deal democrat

There are times the economy is boring.  Ok, ok, especially boring. To the point where I don't have much to say.

This isn't one of those times.  I have stuff worked out in my brain or in the early drafting stages to last over a week. Like an important point of data in last week's jobs report I meant to post earlier this week, but haven't written because thank you stock market!

Anyway, I knew the Senior Loan Officer Survey was coming out, which I track because it is a long leading indicator, but I hadn't read anything.

Turns out there was a good reason for the silence.  It was the opposite of DOOOOMMM!!!

So here is my take, up at XE.com.

Jobless claims make another record low

 

- by New Deal democrat

One reason not to get excited about the last week's stock market swoon is that it isn't being confirmed by any other short term leading indicators.  Most significantly, jobless claims.

The 4 week moving average of new jobless claims has fallen below 225,000. This is yet another 40 year record low. In fact, with the exception of six weeks in the early 1970s, it's a new 50 year low.

And adjusted for population growth, it is a new all-time low.  

As a practical matter, virtually nobody is getting laid off.  This is not an economy that is about to roll over.

December JOLTS report continues good news

 - by New Deal democrat

For the last several years, I kept banging away at the fact that "job openings" are soft data that can simply reflect that companies are trolling for resumes, or looking for the perfect, cheap candidate (good luck with that!). Since I've made my point, let's confine ourselves to the hard data of hiring, firing, quits and layoffs.

Last month I noted that, especially averaged quarterly, the JOLTS report tracks the employment report closely. Since that has picked up in the last few months, I wrote that

it's a fair bet that when the December JOLTS report is released in one month, it too will be weaker, just as was the December jobs report.

Was it?

Historically, hiring leads firing.  While the one big shortcoming of this report is that it has only covered one full business cycle, during that time hires have peaked and troughed before separations: 

Here's what that looks like over the last 24 months:

Last month I wrote:

With hiring up, I expect the level of separations to also increase (note some of these are voluntary) in the next few months as well.

That wasn't the case specifically m/m this month, but I still anticipate that total separations (including voluntary quits, which did go up in December) to follow.

Further, in the previous cycle, after hires stagnated, shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

 

[Note: above graphs show quarterly data to smooth out noise]

Here are voluntary quits vs. layoffs and discharges on a monthly basis for the last 24 months:

Last month I wrote:

With hiring increasing again, if the pattern from the last decade holds, I would expect quits to improve somewhat as well. 

That did happen in  this month's report. As in the last business cycle, quits are still rising, and involuntary separations remain off their bottom, although the good news is that they have fallen in the last several months.

Bottom line: this was a good report.   At the same time, it remains consistent with being late in the cycle.  Since hiring leads firing, what I am looking for next is at what point dies hiring stagnate, and will  quits follow?

Errr, ahem . . .

 - by New Deal democrat

Me, yesterday at 9 a.m. eastern time:

So my best guess is that we will see a climax in panic -- maybe at 9:35 this morning! -- with roughly a 10% decline, and then nervous bouncing along that bottom for the next several weeks.

Just sayin'.

A comment about the markets for the average reader

 - by New Deal democrat

This is a post aimed at the generally Progressive audience of this blog who followed us over from way back in our days at Daily Kos, rather than the financially sophisticated audience who have picked us up since (but of course everybody is welcome to read and appreciate!).

Anyway, at times like this over 10 years ago Bonddad used to write posts like "A comment about the markets" for the DK audience, explaining the "significance" of the market action. So in that tradition ....

First of all, don't base any investing decision on advice from anyone you read online -- including me.  If you are concerned enough, go talk to a registered financial professional. In particular, at times like this, the Doomers are going to come out of the woodwork, especially at places like Daily Kos. It got to the point that in years past, I used to use the "Pied Piper of Doom" at DK as a contrary indicator.  I once even called the bottom of a market selloff similar to the present one *in real time* based on his panicky post.

That being said. here's my take based on over 25 years of watching the markets closely, and seeing this kind of selloff maybe 20 times. Moves of 3% or more a day are based on emotion, either euphoria (less likely) or panic (more likely!), or more recently, "algorithms gone wild!" (think of the "flash crash." That is a very bad basis on which to make a decision about your money.

Because I am a nerd, and I always show you graphs, here's a three-pack to put this in perspective.  First, here is the entire 1990s, the second half of the biggest bull market in history:

Looks like a pretty relentless move up, doesn't it?

Well, about once a year, some sort of panic would set in.  There would be about a 10% selloff, including some panicky days like yesterday, Doomish analysts would come out in droves on CNBC, and at about the 10% mark, a famous maven like Elaine Gharzarelli, would had correctly foretold the 1987 crash, would come on and say something like that her "crash warning" for a 25% drop had been activated. And at almost exactly that moment, the markets would bottom.

Here, for example, is 1996:

Usually the bottom would actually be at about -9.8% or -9.9%. Why? Because big players would have programs set to buy at 10% off. To be sure to get in, other big players would get in front of the move just before the 10% level -- and so it would never actually arrive.

These annual -10% spikes were typically heralded by some change in the market "story," on the order of an increase in inflation or fears of renewed Fed tightening. But they didn't fundamentally alter the economy, and so the 10% was recovered typically within a few months, as it was in 1996.

The worst such move happened in 1998 during the Asian Currency Crisis, when an early hedge fund called "Long Term Capital Management" went bust.  The former was a significant concern, because southeast Asian economies looked set to roll over. The latter sparked fears of a wider financial meltdown.  Here's what that downturn looked like:

The Fed stepped in, arranging for the debt to be mopped up, and it was off to the final blowoff top!

The common thread here is, that in almost all cases, these selloffs in retrospect look like V-shaped spikes, as the fundamental underlying economy reasserts itself.

The exceptions, obviously, were 1929 and 2008, where the underlying economy was really fragile, and subject to a debt-deflation vicious cycle.

As I wrote as recently as last week, the "long leading indicators" for the economy do not forecast any fundamental downturn this year. Interest rates haven't spiked that much, housing data just made new highs within the last several months, and credit is still ample. The stock market, by contrast, is a "short leading indicator," forecasting only a few months ahead.  Why should I expect a short leading indicator to lead the long leading indicators?

So my best guess is that we will see a climax in panic -- maybe at 9:35 this morning! -- with roughly a 10% decline, and then nervous bouncing along that bottom for the next several weeks.

If you are an average worker, and don't own stocks (including in your 401k), you should do what you should always be doing: observing how things are going at your employer. Has there been a weakening of orders or customers? If yes, prepare for possible layoffs. If no, there's no reason to think this market downturn is going to change that.

Even if you do have securities in, e.g., your 401k, how did you feel about stocks a few months back when they were at this level? Were you satisfied? If so, why should you feel differently now? Some of the worst financial moves I have witnessed were people who sold in the panic of 2008, and never bought back.  But if you are losing sleep now,  imagine how you will feel in the face of a genuine 25% pullback, say, in the next recession. That means you should go turn to a financial professional and have a plan that you can sleep with.

In short: don't get emotional about this selloff. Give it the ol' fish-eye. Make and stick with a long-term plan.

And, to repeat, don't make financial moves based on what you read from some dude or gal online, and that includes me.  I am not a certified financial planner, and I am not trying to give you financial advice to buy or sell.

---

P.S. One thing which could cause more turmoil within a few days is if there is another government hutdown, and it lasts a lot longer than the last one. All the signs are that the GOP in the House intends to continue to pass "shrot term" fixes, with long term goodies that they want, and blackmail the D's with the release of one hostage at a time (and I don't think the Dremeres are ever going to be released).  So far the marekts are downplaying any big fallout.

Why I'm not impressed by January's 2.9% YoY wage growth

 - by New Deal democrat

I wanted to follow up on why I dissented Friday from the near-consensus take that workers finally got a nice raise, with many citing hikes in the minimum wage. As you may recall, the YoY% change in the average hourly earnings of all employees rose 2.9% as of January.  

That was the story in, for example, Marketwatch:

Average hourly wages jumped 9 cents, or 0.3%, to $26.74, according to the Bureau of Labor Statistics. That means wages have increased 2.9% over the last year — the biggest gain since the end of the Great Recession in June 2009.The federal minimum wage is $7.25 an hour and hasn’t increased since 2009. But many states and municipalities enacted laws to raise the wage this year.

Even progressive sources like The American Prospect touted the number, under the headline, "The Proof is in: Minimum Wage Hikes Work":

{A]verage hourly earnings for private-sector workers increased by 0.34 percent this month, and 2.9 percent over the past year.Wage levels have struggled to gain traction in recent years, even as the labor market has tightened. But for labor economists and workers alike, these most recent increases could be a sign that wages might finally be on the upswing, thanks to progressive state policies. In the new year, 18 states across the country—from Florida to Maine, and from Washington state to Michigan—hiked their minimum wages, bringing $5 billion in additional pay to 4.5 million workers, according to the Economic Policy Institute.

The reason I dissented is that the YoY% increase for nonsupervisory workers was only 2.4% -- right in the range it has been for over a year.  As Jared Bernstein, who called the number "A Nice Wage Pop,"  pointed out:

There were some weak spots in the report. Wage growth for the lower-paid 80% of the workforce that have production or non-managerial jobs was up only 2.4%, implying that faster wage growth last month mostly benefited higher-paid workers.

Both types of workers are literally from the same survey -- i.e., the one measure is a subset of participants in the whole survey.  So if minimum wage hikes were responsible for the big YoY increase, we should see it in their hourly wages.

In January's case, we don't.

Since nonsupervisory workers account for about 80% of all workers (h/t Bill McBride), we can back them out of the total figure, and calculate the YoY% increase in wages for managers.

Here's what the monthly percentage increase in hourly wages looks like for January:

While regular workers saw nominal wages go up a little under 0.2% per hour, their bosses saw wages go up 0.8% per hour!

Here's what the YoY% rate looks like:

It looks like bosses got, on average, a 2% bonus over and above their regular January wage, bonuses which were not shared with workers. And these are nominal numbers, so if consumer prices wewnt up 0.2% in January (we don't know yet), workers got nothing, while their bosses got a nice pop.

That's why I dissent.

Fly, Iggles, fly!

 - by New Deal democrat

Congratulations to the Philadelphia Eagles on their first ever Super Bowl victory!

Yes, Philly sports fans have a boorish reputation, but they are fiercely devoted to their teams. They have been long suffering in frustration as the Eagles tempted them many times before. over the last half century, coming close under Dick Vermeil, Andy Reid, and also the likes of Buddy Ryan and even Chip Kelly in his first season.

Last night they refused to succumb to the Patriots, with a bunch of gutsy and very effective offensive calls, satisfying millions nationwide who were rooting for the underdogs and/or hate the Patriots dynasty.  So congratulations today!

And one last thing:

What's the matter with North Dakota?!?

Weekly Indicators for January 29 - February 2 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Not surprisingly, stocks and bonds took center stage this week.

January jobs report: good headline growth, mostly negative internals. UPDATE: THE BOSSES GAVE THEMSELVES A RAISE

- by New Deal democrat

HEADLINES:

• +200,000 jobs added
• U3 unemployment rate unchanged at 4.1%
• U6 underemployment rate rose 0.1% from 8.1% to 8.2%

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

Wages and participation rates

• Not in Labor Force, but Want a Job Now: declined -137,000 from 5.308 million to 5.171 million   
• Part time for economic reasons: rose +74,000 from 4.915 million to 4.989 million
• Employment/population ratio ages 25-54: fell -0.1% from 79.1% to 79.0%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: rose +$.0.03 from  $22.31 to $22.34, up +2.4% 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 +15,000 for an average of  +17,300 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 increased by 100 for an average of -46 a month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

November was revised downward by -36,000. December was revised upward by +12,000, for a net change of -24,000.   

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 -0.2 hour from 40.8 hours to 40.6 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by 36,000. YoY construction jobs are up +226,000.  

• temporary jobs increased by +1,800. 
 
• the number of people unemployed for 5 weeks or less increased by +45,000 from 2,235,000 to 2,280,000.  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  +23,000 and  is up +448,000 YoY.


• the index of aggregate hours worked in the economy rose by +0.2%.

•  the index of aggregate payrolls rose by +0.4% .     

Other news included:            

• the  alternate jobs number contained  in the more volatile household survey increased by  +409,000  jobs.  This represents an increase of 2,354,000 jobs YoY vs. 2,114,000 in the establishment survey.      
     
• Government jobs rose by 4,000.       

• the overall  employment to population ratio for all ages 16 and up is unchanged at  60. m/m  and is up + 0.2% YoY.          
• The  labor force participation  rate is unchanged at 62.7  m/m and is down -0.2% YoY at  62.7%  

 SUMMARY   

This was a very mixed report. The headline jobs number was very good, but most of the internals were flat to negative, including an uptick in the underemployment rate, a decline in the manufacturing workweek, and a decline in prime age labor participation. Short term unemployment also increased slightly. 

And of course, wage growth for non-managerial personnel continued to be somnolent.

So while we have a recent increase in employment growth, most of the other measures are either tepid or are fraying a little bit around the edges.

UPDATE: I see where the main item in most other discussions in this report is "the big jump in wages!

Ummm, not so fast.  The "big raise" of 2.9% YoY is for ALL employees, including the bosses. The number for workers who aren't managers, as I report above, is a tepid 2.4%, right about where it has been for several years. So it workers got 2.4% YoY, but workers plus bosses got 2.9% YoY, then that means the bosses gave themselves big fat raises that have not been shared with the line workers.

I'm not impressed.

About that Trump wage boom

 - by New Deal democrat

Over last weekend, I read a bunch of notes which indicated that Trump was claiming credit for a boom in wage growth.

Let's take a look:

THIS is a wage boom:

In the 1960s, real wages grew by almost 9% over 7 years, anaverage of 1.3% per year.

THIS is also a wage boom:

In the late 1990s, real wages grew by just over 9% in 7 years, again averaging 1.3% per year.

This is NOT a wage boom:

During the first year of Trump's term, real wages grew by 0.6%. This is less than half of the rate of a real wage boom.

What's behind the big Q4 decline in real median weekly wages?

 - by New Deal democrat

[Note: This is a post I was working on last week. I hypothesized that the employment cost index would validate the analysis. Well, I didn't get around to posting it, and the ECI came out this morning. So, how did I do? ]

Last week the Bureau of Labor Statistics reported that real weekly median wages declined by over 2% in the 4th quarter of last year!  This is quite the anomaly in the face of generally good data that has been reported in the last few months.

Dean Baker put it in context, noting that for the year 2017, real weekly median wages rose signficantly over 2016:

But I thought I would dig deeper to see why the anomaly had occurred.  So I took a detailed look at each of the three qualifiers: "real," "median," and "weekly."  Where did the dowturn come from?

Well, part of it certainly had to do with inflation.  Recall that one of my favorite measures, "real aggregate wages" actually peaked in July and has declined -0.8% since then, mainly due to an uptick in inflation.  It is easy to break that out, since the BLS also releases nominal weekly wage data.  So here are the two together for comparison:

The uptick in inflation is responsible for about 1/3 of the decline in real weekly median wages.

Next, let's take a look at average hours worked per week:

These actually increased between the 2nd and 4th quarters.  So it's not that fewer hours are being worked per week.

Is something going on with the "median" vs. "average" measures? The next graph compares the weekly measure with real average hourly wages:

Median wages declined more than average wages. So that tells us that the main thing that probably happened had to do with the makeup of the labor force.

To check that, I compared job growth among professional and business workers (a high-paying category) vs. retail workers (a low-paying category).  How much did each grow during recent quarters?  Here's what I found:

Eureka! Professional and business hiring has remained fairly steady, even having a small bump in the second quarter. But the retail apocalypse manifested itself by outright declines in the 3rd and especially second quarters, vs. flatness in the 4th.

It appears the actual outliers were those two quarters rather than the 4th quarter. The downturn in low paying retail jobs in the middle quarters of 2017 made the median 50th percentile worker someone who worked in a somewhat higher paying job.

The best way to test this hypothesis is to see what happened quarter over quarter to pay for identical jobs.  That is exactly what gets measured by the Employment Cost Index. If what mainly happened in the 4th quarter is that the mix of jobs in the economy changed, then the only decline we should see in the E.C.I. is that due to inflation.  That report comes out next week, so we will have the answer soon enough.

----

AAAAND, this morning the Employment Cost index showed that wages *ROSE*  0.5% in Q4, and total compensation rose 0.6%. The  nominalYoY% increase for each was 2.5%:

In real, inflation adjusted terms both wages median compensation declined -0.3%:

So the big dropoff in weekly median wages does indeed appear to be a story of a change in the mix of jobs, rather than a drop in actual pay of a job. Still, nominal wage growth in the latter part of 2017 was eclipsed by the uptick in inflation. This, by the way, adds to the evidence that the increase in consumer spending in the last few months has been driven by the wealth effect (increasing house and stock prices for the affluent and wealthy) and dipping into savings for everybody else.

My forecast for the second half of 2018 is ...

- by New Deal democrat

... over at XE.com.

'nuff said?

Is the economy partying like it's 1999?

 - by New Deal democrat

Suddenly I have a lot to say about the economy. My sense is that we are on to a new phase after the 2015 shallow oil-patch centered recession and 2016-17 rebound. The data has a feel to it of a late cycle blowoff.   

Let's start with this morning's personal income and spending.  In the last 4 months, personal consumption expenditures, like retail sales, have taken off: 

Typically after mid-cycle personal consumption expenditures outpace retail sales (10 of the 11 previous cycles, to be precise). This is so regular that it is a primary mid-cycle indicator for me.

Well, as you can see, in the last 4 months, retail sales have come roaring back, even compared with PCE's.  But if you cast your eyes to the left edge of the graph, you can see the tail end of the same phenomenon in 1999. Although I haven't posted the nominal (vs. inflation adjusted) numbers, the same thing happened in the late 1990s.  In 1999, both retail sales and PCE's accelerated, but retail even more than PCE'S. When the stock market peaked at the beginning of 2000, both started declining rapidly, culminating in a recession 15 months later. 

That we might be entering a blowoff stage is confirmed by the personal saving rate, as shown below:

Rapid declines in this rate tend to happen after mid-cycle. On the one hand, they are signs of economic confidence, as consumers are willing to go further out on a limb with finances. On the other hand, the lower savings rate leaves consumers vulnerable to future shocks.

In 1999, the blowoff was highlighted by the wealth effect.  The recent melt up in the stock market may be energizing the same behavior.  In particular, soaring consumer confidence in the last 4 months is concentrated on GOPers:

Even democrats feel a little more confident, and independents significantly more so.  In 2013, the situation was reversed, where it looked like increased spending was powered by confident democrats (GOPers thought we were in the abyss).

Another facet of the data that suggests a blowoff might be underway is the surge in interest rates.  Below is a graph of 2-, 10-  and 30 year rates since just before the presidential election:

As of this morning, 2 year rates are 2.14%, and 10 year rates are above 2.70%, a nearly 4 year high. 

I don't profess any insight as to whether interest rates will continue to rise or not, but it is interesting that the 30 year bond has not broken out of its high one year ago.

Which brings me to the point that, like gas, the cure for high interest rates is -- high interest rates.

Here's a graph of 30 year mortgage rates:

Like the 30 year bond, these have not made a new 1 year high. As of this morning, conventional 30 year mortgage rates are 4.28%, about 0.10% below their 52 week high of 4.38%.

Housing stalled for several quarters last year in the face of aa 1% increase in mortgage rates, and slowed down even more in 2014 when mortgage rates rose 1.4% off their bottom.  If mortgage rates hit 4.4% and stay above that level for several months, I expect another housing slowdown to begin, although given the demographic tailwind from the Millennial generation, I wouldn't expect an outright downturn in housing unless mortgage rates rise all the way to about 5%.

In other words, it is probably OK to party like it was 1999. There wasn't a recession until 2001, and this blowoff isn't likely to give way to a recession in the immediate future either.

Weekly Indicators for January 22 - 26 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.  Aside from more mixed long leading indicators, there has been this anomalous decline in rail and steel.

Leading components of Q4 GDP forecast continued growth in 2018

 - by New Deal democrat

This morning's release of Q4 2017 GDP was in line with estimates, rising 2.7% on a preliminary basis.  As usual, my attention is focused less on where we *are* than where we *will be* in the months and quarters ahead.

There are two leading components of the GDP report: real private residential investment and corporate profits. Because the latter will not be released until the second or third revision of the report, I make use of proprietors' income as a more timely if less reliable placeholder.

So let's take a look at each.

The news on real private residential fixed investment was mixed.  Measured both by itself (blue), and by the more precise method of its share of the GDP as a whole (red), residential investment rose. But although it came close, it has not made a new high since three quarters ago:

Proprietors' income was clearer, breaking out to another new high:

Together these are pretty strong evidence that the economy will continue to expand through the rest of 2018.

One final note: although the GDP reports have been good for the last three quarters, I'm not expecting any big positive breakout.  This goes back to the relative flatness or restrained growth in housing.  The below two graphs show the leading relationship between housing permits (using the less volatile single family measure) and GDP broken up into two roughly 30 year periods:

The YoY% change in permits for the last 3 years has been roughly 10% (divided by 4 for purposes of scale in the above graphs shows a number of ~2.5%).  While there is certainly not a 1:1 relationship in the numbers, continued roughly 2.5% YoY growth of GDP for the next few quarters is a reasonable projection.

Housing: sales and prices accelerate in Q4 2017

 - by New Deal democrat

With the exception of rental vacancies and pricing, which should be released next Tuesday, with the morning's release of new home sales we now have a good look at the very forward-looking housing market through the end of 2017.

Both sales and prices have started to accelerate.  This post is up at XE.com.

A note on December existing home sales

 - by New Deal democrat

First of all, sorry for the light posting this week.  There's not much news until tomorrow and Friday, and yesterday was a travel day.  So.....

While existing home sales are about 90% of the entire housing market, they are the least important economically, because of their much more limited impact since they do not involve any new construction.

That being said, December's existing home sales, at 5.57 million annualized, were only 1% above last December's pace. First and foremost, that's a matter of higher mortgage rates this year. In fact, mortgage rates haven't made a meaningful new low since 2013 -- although they briefly neared that low in late 2016 -- and that has shown up in a gradual deceleration of the pace of sales since that time, as show by Bill McBride's graph below:

Here is a close-up of the last three years from FRED, excluding today's report, which hasn't been posted yet:

Here's the same data YoY, compared with housing starts in red, averaged quarterly to cut down on the volatility:

The same pattern of decelerating growth is shown in both series.

Although sales turn before either prices or inventory, the consistent price increases and lack of inventory are playing a role in this deceleration, contra which is the demographic tailwind.

Tomorrow the more important, and leading (but very volatile) new home sales report will be released.  I am expected a significant downward revision in November's blowout number.