Weekly Indicators for March 11 - 15 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The rebound after the government shutdown has lifted the nowcast into slightly positive territory.  Still, it seems clear at this point that the shutdown caused the already-weakening economy to skirt with recession during December and January.

In my opinion Dean Baker is correct. Recessions aren’t as sneaky as Austin Goolsbee claims in his NYT article yesterday. What the *possible* “mini-recession” of December and January has in common with the very shallow 2001 recession is that both feature a weakening economy that is then hit with exogenous events, including poor government policy (the “China shock,” Trump’s trade wars, the government shutdown) and also in 2001, the September 11 terrorist attacks.

But as Baker points out, 2001 highlighted the bursting of a stock market bubble, apparent in the long leading indicator of corporate profits. Other long leading indicators had also flashed warning signals:

• Housing had also declined over -10%, as measured by the long leading indicator of single family housing permits.
• Long term interest rates had climbed over 2% from their 1998 lows. 
• Real M1 had fallen by almost -7%
• The yield curve had inverted.
• Bank lending had gotten tighter.
• Real retail sales per capita had peaked a year before.

Really not sneaky at all.

UPDATE: If you don’t want to go behind the NYT’s paywall, here is what Goolsbee said, via the trusty commenter Anne at Economist’s View. Goolsbee’s position is actually pretty close to what I’ve written above. Small shocks like poor government decisions can take a weak economy and tip it into recession, although Goolsbee focuses on consumer confidence.

Industrial production weak, while JOLTS employment remains strong

 - by New Deal democrat

I’ll have more to say next week, but for now here are the headlines on this morning’s data.

Taken together, production and employment are the King and Queen of coincident indicators - certainly in terms of how the NBER scores expansions and recessions. Both February industrial production and January JOLTS for employment were reported this morning, and delivered differing messages.

First, industrial production for February was weak. While total production gained slightly (+0.1%), manufacturing production declined for the second month in a row:

Here is what that same data looks like measured YoY:

There may have been a production boom last summer, but it’s over now.

If industrial production is the King of Coincident Indicators, then employment is the Queen. The JOLTS report for January, which included substantial revisions for all of 2018, included an all-time high in the number of quits (red), and an improvement in hires (BLUE):

Not shown, but layoffs and discharges made a new 12 month low, and openings were just below theirs. If there is a fly in the ointment, it is that since midyear 2018, there has been very little improvement in all of the JOLTS metrics except for layoffs and discharges.

Basically, production and employment taken together show deceleration since summer of 2018, with production actually contracting slightly while employment continues to improve.

Initial jobless claims not at warning levels yet

 - by New Deal democrat

With the economy slowing so markedly, suddenly there is a lot I can post about!

So here is a quick note about initial jobless claims. They are a short leading indicator, and at least as smoothed over a 4 week or monthly average, they aren’t too noisy.

I have two ways of looking at them:

1. The four week moving average rises more than 10% above its low point almost once a year. But by the time it is 15% above its low, a recession is usually imminent or may even have begun. So my cutoff point is 12%, above which there is a significantly increased chance of an oncoming recession. In September, this average hit its expansion low of 206,000:

If the 4 week moving average rises above 230,600, this metric is triggered. It did hit this number last month likely due to the government shutdown, but I am discounting that.

2. If the monthly average turns higher YoY for two consecutive months, that usually gives a short warning that a recession is about to begin. As the below graph shows, it was higher YoY in February:

If it averages higher than 228,600 for March, it would hit this point. For the first two weeks of March, it is 226,000:

Triggering one metric results in a yellow flag “caution”; hitting both results in a red flag “warning.”

Although we are close in both metrics, neither has been triggered yet.

Leading scenes from the February jobs report

 - by New Deal democrat

Let me catch up with some details from last Friday’s employment report.

As a preliminary matter, the overwhelming take was that the poor +20,000 gain was “nothing to see here, just an outlier.” The problem with that take is that, for all of 2018, the average monthly gain in jobs was just over +200,000 a month. January came in more than 100,000 above that, at +311,000 jobs, and yet I don’t recall anyone taking the same position, that it was just an “outlier” to the positive side then! Here’s a graph, from which the 2018 average of 204,500 monthly jobs gain has been subtracted, so that the variance from that average shows as positive or negative:    

So, yes, it’s true that February was a bigger outlier, to the downside, than January was, to the upside, but both were outliers. If you average the two months together, you get +165,500 jobs per month, a significant downdraft from the 2018 average.

Moving on, last week I said to pay attention to three leading sectors of jobs: temporary jobs, construction, and manufacturing. In the past I’ve shown that at least 2 of the 3 sectors contract for a number of months before any recession begins. Here’s what all three sectors look like from January 2018 to the present:

We had a contraction in temp jobs in January, from revisions, and a contraction in construction in February, after an outsized January gain. Manufacturing hung on with a small gain.

Here’s the same information graphed as the YoY% change, first over the past 8 years:

The 2015-16 “shallow industrial recession” clearly stands out as a pocket of weakness.

Now here’s a close-up since the beginning of 2018:

All three show decelerating YoY gains since roughly the beginning of last autumn.

Last week I also said that I expected the YoY pace of job gains to start decelerating. Only one month, of course, but it did do that:

 

YoY job gains are at the lowest in over 6 months.

Finally, let’s take a look at two more leading metrics contained in the jobs report.

First, the manufacturing work week:

Historically, this starts deteriorating before manufacturing jobs. It is presently down -0.6 hours from its peak in summer of last year. In the past a decline of -0.5 hours has typically been associated with at least a slowdown, and by the time the decline hits 1.0 hours you are on the cusp of a recession.

Next, short term unemployment of less than 5 weeks. This is one of the “short leading indicators” listed by Prof. Geoffrey Moore:

Typically if the three month average is less than 5% above its low, the expansion is intact. If that average is more than 10% above its low, a recession is near or may have just begun. Presently the three month average is 6% above its recent low. Take this with a grain of salt, because it includes the government shutdown month of January.

The bottom line is that, even averaging January with February, all of the leading employment indicators show some deterioration, but none of them are at a point where I would expect them to be if a recession were imminent.

More evidence for a Q4 “Recession Watch”

 - by New Deal democrat

About a month ago, based on those Q4 2018 reports that had not been delayed by the government shutdown, plus workarounds for those that were missing, I went of “Recession Watch” for Q4 of this year.

Now all of the missing pieces have been reported, and they add to the evidence justifying the call. 

This post is up at Seeking Alpha.

My base case remains slowdown vs. recession. But I see a slowdown becoming more entrenched as the year goes on, and government policy missteps (good thing we have a competent Administration, so we won’t see any of those! /s) could easily tip us into contraction. If we do go that route, it probably won’t be led by the producer side of the economy, but rather by stretched budgets on the consumer side.

Real wage growth continued to improve in February

 - by New Deal democrat.     

Now that we have February’s CPI (up +0.2%), let’s update nominal and real wage growth.

First, here is a graph of nominal wage growth YoY vs. consumer inflation YoY since the beginning of this expansion almost 10 years ago:

First of all, why do I bother with nominal wages? Because employers don’t give out inflation-adjusted salary and wage increases. If they give you a 3% raise, it’s a 3% raise regardless of what happens to inflation. And the long term picture is that nominal wage growth decelerates coming out of recessions until unemployment (or, more likely, underemployment) falls to the point where employees gain a little bargaining power:

To return to the first graph, nominal wage growth has been improving YoY since late 2012. Meanwhile CPI has been meandering around a 2% YoY average, depending on what has been happening with gas prices. Since lately these have been stagnant or down YoY, consumer inflation has waned.

As a result, real wages have improved considerably in the past year, to the point where they are now exactly -3% off their peak in the early 1970’s:

But because aggregate payrolls declined in February, according to the employment report, the aggregate pay that non-managerial workers took home, in real terms, declined by -0.4% in February. In real terms, this amount has increased by 28.2%, down from an increase of 28.6%, more than they earned at the worst point after the Great Recession in October 2009:

Neverthelss, real wage growth in general continued to be good news. Be aware, however, that real wage growth is a long *lagging* indicator, that starts up well after a recession bottoms, and can continue even into the next recession.

Negative Nov. and Dec. revisions overwhelm positive January retail sales

 - by New Deal democrat

The initial spin on this morning’s delayed retail sales report for January has been positive, with for example the Wall Street Journal calling it a “rebound” and “a sign of solid economic momentum in the first quarter.”

Ummmmm, No.

Both nominally and in real terms, retails sales did improve by +0.2% in January over December.

The problem is, both November and December were revised downward. In particular, December’s initially reported poor -1.2% showing got even worse, to -1.6% nominally. In other words, for the two months combined, retail sales even measured nominally declined by -0.2%.

Here’s what they look like in real terms through January:  

Because real retail sales tend to lead employment (red in the graph below) with a variable lag on the order of 6-9 months, this downturn in retail sales is more evidence that February’s poor employment report should not simply be dismissed as an outlier:

On a YoY basis, real retail sales peaked over a year ago. They have sharply decelerated since then all the way to roughly zero. We should expect employment gains to also decelerate, and February’s poor report is consistent with such a deceleration having started.

I expect to put up a more detailed look at Seeking Alpha, probably tomorrow. Once it is up, I will link to it here.

A modest proposal to use FICA-style tax withholding as a transition to “Medicare for All”

 - by New Deal democrat

Probably the foremost reform advanced by the Democratic Party at present is “Medicare for All.” Personally I don’t particularly care whether it is ultimately necessary to have single payer (like Canada) or universal coverage (like France or Germany) or a hybrid of each (like Australia). I am fond of the Japanese saying that translates as “There are many paths to the top of Mount Fuji,” but let’s set that aside for now.

What is generally acknowledged is the problem of how to create a “bridge” between the hodge-lodge of government and employer-based coverages we have now to whatever is ultimately passed as “Medicare for All.” That’s because there will understandably be a lot of blowback if people “lose” an employer healthcare plan, or else get hit with a new tax.

I propose that a system of payroll tax withholding that includes Obamacare and “Medicare for All” plans in addition to employer-provided medical benefits will work. Specifically, I propose three tweaks to Obamacare as it existed in 2016:

       1. Two new spaces for mandatory FICA-style tax withholding spaces are added to each paycheck. One is for “Medicare for All” employment coverage, and the second is for “Medicare for All” unemployment coverage.   

     2.  The individual mandate penalty that the GOP killed in 2018 remains dead. But it is replaced, in all cases where an individual is not covered by employer-provided coverage, with an automatic payroll deduction for individual enrollment that defaults to the least expensive monthly bronze plan for individuals under 40, and the least expensive monthly silver plan for individuals age 40 through 64. This would kick in only for new employees in the first two years, after which it would apply to all employees.

     3. Employers could voluntarily purchase, on behalf of their employees, coverages that are at least at the mandated levels set forth in #2 above.

Here’s how it would work. Let’s start with two specimen paychecks. The first is from New York State. The second is for a state that does not have Medicaid expansion or mandatory unemployment withholding.

Note that, as required by law, all employers must withhold Social Security and Medicare taxes (FICA). Each of the two specimen paychecks above has specific boxes for that FICA withholding. By contrast, Medicaid is not funded by payroll taxes, but is a direct government responsibility. Additionally, the employer *may* also withhold taxes for, e.g., the employer’s medical plan, and state unemployment insurance, as we see in the first of the two specimen paychecks above.

As indicated in #1 above, I propose that two more boxes for mandatory withholding would be added to all paychecks. Call them MFA1 for medical coverage while employed, and MFA2 for medical coverage during periods of unemployment. 
 
Most importantly, note that FOR MOST PEOPLE BOTH NUMBERS WOULD BE ZERO! Specifically, both “MFA1 and MFA2” would be zero if the employer provides health coverage, and is subject to COBRA. 

But if the employer does *not* provide coverage, then, just like when you start a job you tell your employer how many standard tax deductions to withhold, a person with an Obamacare policy would have that amount withheld and either automatically sent to their provider, or a second check made out by the employer to the provider. If an employee d oes not have Obamacare, and does not select a provider, then the MFA1 withholding would pay the default low cost bronze or silver Obamacare provider, depending on the employee’s age, as set forth in #2 above.

Further, an employer who is not currently providing coverage, or wants to end their own program and switch to an Obamacare plan, could automatically enroll all employees in such a plan, provided the Obamacare plan is at least at the equivalent level of the employer’s current plan. I envision this provision might be temporary, e.g., in effect for only 5 or 10 years by which time I suspect most employers will be out of the employer-sponsored healthcare business.

“MFA2” would be meant to fund Obamacare insurance coverage for those who are not employed and are not covered by  SCHIP, VA coverage, or a state-sponsored Medicaid  or unemployment plan (Hence the difference between the two paychecks). I anticipate that this would be a small universe of people. Just as a back of the envelope guess, let’s peg that at 5% of the total. In other words, it anticipates that for all people as an average, maybe for 2 of 40 working years between 25 and 65, that average  person would need such coverage. If the average Obamacare premium were, let’s say $400 per month, 5% would be an MFA2 amount of $20. Again, in a state where Medicaid or other plan covers this, THE AMOUNT  OF MFA2 TAX WITHHOLDING WOULD BE ZERO. IT WOULD ALSO BE ZERO IF THE PERSON HAS AN EMPLOYER PLAN, IN WHICH CASE COBRA APPLIES.

Finally, I envision the plan being phased in for new employees for 2 years. That’s because there is a lot of job turnover. Many if not most people who do not have employer healthcare coverage, nor existing Obamacare policies, are likely to start a new job during that period. Thus, they’re never going to notice a decrease in take-home pay in an existing paycheck, because it won’t happen! It is simply going to be part of the standard deductions in the paycheck they receive from a new job.

In summary, under my for a FICA-based “bridge” to “Medicare for All”:

• ALL medical coverage for workers, whether provided by the employer or by Obamacare or “Medicare for All”, would be paid for by mandatory withholding taxes in paychecks.
•  a person who has an existing employer healthcare plan won’t have to give up their plan. They will also pay no new taxes. 
•  A person who presently is covered by Obamacare or some other government plan individually likewise won’t have to give up their plan. At most their premiums will be paid directly out of their paycheck vs. having to pay individually out of their take home pay, and they will have to pay the “MFA2” withholding. But they won’t even notice that if they get a new job within the first two years. 
• Nobody on any existing other government plan is affected. And EVERYBODY is covered, including those who don’t qualify for any other plan including existing Obamacare — that’s what “MFA2” withholding is for. At worst if they started out adulthood with no coverage, and had no job, so that they had never paid for “MFA2” coverage before, there might be a lien or surcharge on their “MFA2” withholding once  they started their first job.
• in combination with all existing private and public plans, this proposal provides universal health care coverage.

Submitted for your consideration.

Weekly Indicators for March 4 - 8 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The distortions caused by the government shutdown appear to have ended, which has given the indicators generally a little boost.

As always, clicking on the link and reading should hopefully be educational for you, and helps reward me a little bit for the work I put in.

February jobs report: the first sign of the economic slowdown spreading to jobs?

 - by New Deal democrat

HEADLINES:

• +20,000 jobs added
• U3 unemployment rate -0.2% from 4.0% to 3.8%
• U6 underemployment rate  -0.8% from 8.1% to 7.3% (NEW 20 YEAR LOW)

Here are the headlines on wages and the broader measures of underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: down -32,000 from 5.254 million to 5.222 million
• Part time for economic reasons: down -837,000 from 5.147 million to 4.510 million
• Employment/population ratio ages 25-54: unchanged at 79.9% 
• Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.08 from  $23.10 to $23.18, up +3.5% 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.) 

Is a recession close?

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 hours from 40.8 to 40.7 hours. This is one of the 10 components of the LEI.
• Manufacturing jobs rose +4,000. YoY manufacturing is up 242,000.
• construction jobs declined -31,000. YoY construction jobs are up 373,000.  

• temporary jobs rose +5800. YoY these are up +67,000.
• the number of people unemployed for 5 weeks or less fell by -131,000 from 2,325,000 to 2,194,000.  The post-recession low was set nine months ago at 2,034,000.

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 an average of +12,000/month in the past year 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 +160/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

December was revised upward by +5,000. January was also revised upward by +7,000, for a net change of +12,000.

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) rose by +42,000 and  is up +537,000 YoY.
• the index of aggregate hours worked for non-managerial workers fell by -0.6%

•  the index of aggregate payrolls for non-managerial workers fell by -0.3%    

Other news included:            

• the  alternate jobs number contained  in the more volatile household survey increased by +255,000  jobs.  This represents an increase of 1,736,000 jobs YoY vs. 2,509,000 in the establishment survey.    
• Government jobs fell by -5000.

• the overall employment to population ratio for all ages 16 and up was unchanged at  60.7% m/m and is up 0.3% YoY.          
• The labor force participation rate was unchanged at 63.2% and is up +0.2% YoY.

SUMMARY

There are two themes to this report. The first is that it reversed both last month’s establishment and household reports. Last month the first was excellent and the second was poor. This month the establishment survey laid an egg, as featured in the headline number, while the household survey rose smartly, as featured in involuntary part time work, discouraged workers, and both the unemployment and underemployment rates. Positive news also included another good increase in non-supervisory wages.

But this month’s report actually went beyond taking back January’s report. The YoY change in construction, manufacturing, and total jobs for the last two months combined are all lower than they were in December. So we both aggregate hours worked and aggregate payrolls. The manufacturing workweek declined for the second month in a row.  It’s also worth noting that the YoY increase in the household report is significantly lagging the establishment report.

In summation, I suspect this month marked the first month in which the economic slowdown showed up in the jobs report.

Two more leading sectors to watch for in tomorrow’s jobs report

 - by New Deal democrat

Yesterday I updated my look at temporary jobs, a known leading indicator for jobs overall.  Today I want to look at two more leading sectors: manufacturing and construction. 

Unlike temporary jobs, I’m not looking for a possible decline. Rather, I am looking for a deceleration in growth from their recent peaks. Let’s take them in order.

    

First, manufacturing. Because the ISM is picky about allowing FRED to publish their data, I have to do this in two separate graphs. So, the below two graphs are of the ISM manufacturing index and its new orders sub index, followed by the YoY% change in manufacturing employment:

The important point of the two is that manufacturing jobs tend to follow the ISM index with a 6 to 12 month lag. Thus, for example, the ISM manufacturing index first went into contraction (a reading below 50) in October 2015. Manufacturing jobs didn’t contract YoY until March 2016. By June 2016 the ISM index had turned positive again. Manufacturing jobs didn’t get there YoY until February 2017.

In 2018, the ISM manufacturing index peaked in August. So I am expecting YoY growth in manufacturing jobs to decline. Since one year ago manufacturing added 30,000 jobs in February, I am expecting substantially fewer than that to be added tomorrow.

Second, construction. The first graph below compares the YoY% change in construction spending adjusted for inflation (blue) with construction jobs:

Although the former is somewhat noisy, it is pretty easy to see that usually  construction jobs have followed spending by a few months — except in the last couple of years, and arguably during the first couple of years (2006-07) of the housing bust.

Looking at the absolute values of the same data series is helpful (note that both series have been normal to 100 as of January 1994):

 

Now we can see that the two grow or decline at nearly identical rates over the longer term, with jobs following spending with a short lag.

But the other thing that jumps out is how spending outpaced jobs growth (I.e., blue line above red line) during the housing boom, and again during 2015-17. This suggests that during those periods existing workers were getting more hours, rather than more workers being hired. When demand waned, first hours were cut before layoffs began. Since spending has only fallen back below jobs in the past half year, I’m not expecting a decline in construction jobs, but rather a leveling off in the YoY pace.

This can be summed up by looking at the monthly gains for the past year in manufacturing (blue) and construction (red):

 

Tomorrow I am looking for continued gains in both manufacturing and construction, but a cooling in manufacturing vs. continued trend growth to a slight deceleration in construction.  In both cases this means gains of less than 30,000, and possibly as low as 5,000. Because the economy is slowing, and this should show up in jobs numbers, if there is a surprise in either or both, it will likely be to the downside.

Finally, I expect YoY overall jobs growth to begin to decelerate from its peak last month:

 

which means a gain of fewer than 200,000:

We’ll see tomorrow.

This Friday, watch out for an outright decline in temporary employment

 - by New Deal democrat

Almost a month ago I flagged the decelerating staffing index, and showed how it corresponded with the leading sector of temporary jobs in the monthly jobs report:

the Staffing Index isn’t seasonally adjusted, [so] you really have to compare each on a YoY basis. And while the two don’t turn positive or negative at the same time or for the same duration, they do correlate well on YoY direction; i.e., acceleration or deceleration in the YoY comparison.

I concluded:

[This deceleration] makes me think that the deceleration of temp jobs in the monthly report for the last three months, as shown in the final graph below:

hasn’t just been noise, but - while still positive - is demonstrative of real weakness. 

Since then, beginning three weeks ago, the Staffing Index has gone negative. As of this week, it is down over -1% from a year ago, and even negative compared with two years ago:

As a result, I expect at minimum that this Friday’s employment report will show that temporary help jobs have also decelerated YoY. Since in  last February 12,000 temp jobs were added, that isn’t much of a constraint.

But the average for the last three months has been declined to +3,000 per month. With the Staffing Index having continued to roll over since the beginning of this year, that is a more realistic ceiling on what I am expecting on Friday, and there’s probably a 50/50 chance of an outright decline will be reported for February.

The bottom line is that almost all of the other economic data has been validating the “slowdown” forecast I made beginning last summer, and I expect employment to follow — and temporary jobs will probably lead the way.

February services index strong; new home sales in line with bottoming scenario

 - by New Deal democrat

Just a quick note on this morning’s economic data.

First, new home sales improved in December from October and November’s relatively dismal pace (blue in the graph below). We are back to the levels of last summer, but still down from one year ago (including as the more stable, less noisy 3-month rolling average)(red shows prices, which have been moving in tandem with sales during this expansion): 

This is of a piece with yesterday’s December permits and starts data. Both metrics are down, but look likely to bottom within a few months in response to lower long term interest rates.

Second, the ISM services, or non-manufacturing, index came in at a very good 59.7. Here is that metric for this expansion (via Briefing.com):

As you can see, this metric is doing very well.

ISM doesn’t let FRED publish their data any more, but fortunately there are long-term graphs since the beginning of the series 20 years ago that are still around. Here’s one from 5 years ago, comparing services with manufacturing:

The important thing here is that, unlike the manufacturing index, which is a leading indicator, services are a coincident, and possibly even lagging indicator (look at 2008). If and when ISM services slips to 50, that will probably mean that a recession is imminent or has already started.  But no worries for the moment!

Residential construction declines in December, but looks to be bottoming

 - by New Deal democrat

Residential construction spending lags sales, permits, and starts. But it still leads the economy overall, and it is a much smoother data series, with little noise. It is almost all signal, and so it is an important confirmation of the more leading data.

In December, residential construction spending did decline vs. November and also vs. one year ago, but it was higher than September’s and October’s numbers. 

Let’s go to the graphs. Here’s the absolute level of residential construction spending (blue) vs. single family permits (red), first a long term look, and then focusing on the last several years.  As usual, I choose single family permits because they are the least noisy of all the more leading data:

That permits lead construction is easy to see. In the second graph, the declining trend in 2018 with construction following permits with a brief lag is also apparent.

Here is the same data as YoY% changes since the bottom in 2009:

Both series are down YoY.

That neither series has made new lows in several months is encouraging. Although I think there is a little further to go in the next few months, Unless the Fed surprises nearly everybody and raises rates again, I strongly suspect that the bottoming process in new home building is ongoing. 

December housing summary at Seeking Alpha

 - by New Deal democrat

I haven’t done a comprehensive update on housing in a few months, in large part because of the lapse in data during the government shutdown.

With last week’s report on December housing permits and starts, plus several house price indexes, I put up an update over at Seeking Alpha .

As usual, clicking over and reading should be educational for you, and helps me with a bit of $$$.

Also, we’ll get December construction spending later this morning, and new home sales tomorrow. I’ll update further as warranted once these (especially spending) are reported.

Climate change is the detonation of the Population Bomb

 - by New Deal democrat

You know the drill ... it’s Sunday so I speak my mind on things non-economic.....

Way back in the days of the dinosaurs when I was a young teen, I concluded that there were really only two extinction level threats to humanity:

1. Nuclear war 

2. Overpopulation (a/k/a “The Population Bomb”)

As to the first, fortunately we have gone over 70 years since Hiroshima and Nagasaki. But I find it difficult to conclude that unless something changes, over a long enough time horizon, like 500 years, a nuclear war won’t happen. Just consider the likes of Donald Trump and Kim Jung Un with their fingers on the button, and wonder how long till someone like them makes a fatal mistake.

As to the second, we have the example of Easter Island, where the last tree is cut down, and the last food-source is exhausted. Humanity disappears.  All you need to consider is whether the Easter Island experience can be scaled up to the entire planet.

I have thought a lot recently about climate change, and increasingly think it is ultimately a manifestation of the Population Bomb.

I am currently reading historian Yuval Noah Harari‘s “Sapiens: a Brief History of Humankind.”  I’m not sure if the book as a whole is very recommendable. Much of it comes across as broad-brush sociological speculation, some of it provocative (e.g., money is the most universally accepted part of human culture. One culture may hate another, but will universally be willing to trade in their accepted coin or currency.), and some of it flimsy (e.g., why patriarchies are much more common than matriarchies). Perhaps the most interesting observation is that what sets humans apart from other social animals is our willingness to cooperate on both an individual and massive scales with complete strangers. A look at human population growth shows just how successful that has been.

The first modern human, our “Eve,” lived about 200,000 years ago. Probably the genetic mutation that she spawned was the dropping of the voice box further into the throat, enabling speech (as opposed to, e.g., grunts or gestures). So magical was the ability to speak that those endowed with it - the new human species - expanded through Africa and then ultimately out of it to Europe and Asia about 70,000 years ago.

What does that have to do with climate change and overpopulation? According to Harari, along the way, something alarming happened. 

 - About 45,000 years ago, humans arrived in Australia. Shortly thereafter, almost all of the large predator and prey species went extinct.
 - About 16,000 years ago, humans arrived in the Americas. Shortly thereafter, almost all of the large predator and prey species went extinct.
 - About 800 years ago, humans arrived in New Zealand. Within 200 years,  most of the large predator and prey species were extinct.

(As an aside, it’s possible that humans had a partner in crime in these extinctions.  Below is a still of the last frame of the move “Alpha,” a fictional account of the first wolf that partnered with a human:


I don’t know about you, but if I were a prey animal and I saw a combined human-wolf-pack like that coming at me, I would be thinking, “Oh, sh#t! We are SO dead!” The evidence is that wolves were domesticated long before humans settled into agricultural communities, so almost certainly hunting as a team had something to do  with it.)

But that’s not the point. The widespread extinctions of “megafauna” that coincided with the arrival of modern humans on the scene is just one example of the global impact of the “anthropocene” epoch.

Here is a graph of the entire world population over the past 7000 years:

 

But this is a case where a chart might is even more devastating, as in the below, which based on figures cited by Harari and others, is what human population growth has looked like ever since that first “Eve” 200,000 years ago:

Years ago.     World population   doubling rate
200,000                      1
 75,000              80,000
 12,000         8,000,000  ~10,000 years
   3,000       80,000,000     ~2800 years
      200     800,000,000       ~850 years
Present  8,000,000,000         ~60 years

Not only has the human population exploded in raw terms, but its rate of growth has actually been accelerating ever since the “agricultural revolution” that began roughly 12,000 years ago.

Meanwhile, the last megafauna on the planet, like Siberian Tigers and African Elephants, teeters on the edge of extinction. Two thousand years ago megafauna that we associate with sub-Saharan Africa was also present along the temperate region along the Mediterranean coast. It disappeared via the Roman Coliseum. A little over 100 years ago, partly as an effort to exterminate the Indian tribes, American buffalo were hunted down to about 400. Now we are busy driving even ocean life, for example cod and lobster, towards extinction.

As these resources decline, their cost increases dramatically. Two hundred years ago lobster was junk food. Caspian Sea caviar costs a year’s salary. And need we talk about the concept of “peak oil”?

Just in the last year, evidence was adduced that possibly the death of up to 90% of Native North and South American tribes due to diseases introduced from Europe after 1492 caused so much re-forestation that it contributed to the “Little Ice Age.”

And so now we come to global warming. Here’s a graph of average ocean temperatures in the past 150 years:

 

And here is carbon dioxide levels in the atmosphere for the past 300 years:

 

Does anyone seriously think that the half measures and quarter measures being contemplated — and fiercely opposed — are going to make a meaningful dent in the trend in those two graphs?

The simple fact is, humanity has been slowly — but at an accelerating rate — turning the entire planet into Easter Island. I strongly suspect that we have already crossed the threshold beyond the Earth’s long term carrying capacity for the human race. The planet could handle 8 million, 80 million, and even 800 million humans without widespread damage. There is evidence everywhere in the animal, ocean, and atmospheric environment that it can’t handle 8 billion humans for long.

Want to defeat climate change? A global one-child policy for two generations, bringing total human population down to where it was in about 1950 might be enough. It almost certainly will never happen.

But if human population has already exceeded the carrying capacity of the planet, humanity will get there, willingly or not.        

Weekly Indicators for February 25 - March 1 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Last year the most significant developments were in the long leading indicators. Now that is translating into the short leading indicators.

As always, clicking and reading not only should be educational for you, but rewards me a little bit for my efforts.

Manufacturing holds on in February

 - by New Deal democrat

The theme for most reports remains that the government shutdown in December and January, plus a 30 year record cold snap for a week in January, put a real dent in the economy. That certainly was the message of December personal spending and December and January personal spending this morning.

But it looks like there was no significant damage to manufacturing. This week three regional Fed banks reported February manufacturing in their region, followed by the Chicago PMI, and finally ISM manufacturing this morning.

At the end of January, the average new orders reading of the five regional Feds was +5. After much storm and drang, notably a big downdraft in the Kansas City region, but an even bigger updraft in Richmond, the average for February increased +1 to 6.

One regional Fed that does not report is Chicago, but the Chicago PMI’s new orders index, which has been running hotter than the other regional reports for months, also bounced back strongly in February, from 53.2 to 68.4 (which is still not quite as positive as it was for a number of months earlier last year). Subtracting 50 to make this compatible with the Fed indexes gives us an increase in the average from +5 in January to +10 in February.

Finally, this morning the ISM new orders index for February declined to 55.5 from January’s 58.2 reading. The total index declined from 56.6 to 54.2, the lowest in nearly two years (h/t Briefing.com):

This of course is still well into positive territory, and in line with most of this expansion. It is also in line with the average of the regional Fed reports. Chicago looks like the outlier.

The bottom line remains that manufacturing is decelerating from its torrid pace last summer, but is still expanding decently. Because I anticipate further slowing in the economy over the next 6 to 9 months, I am still expecting further deceleration in manufacturing. Whether it goes beyond that into outright contraction is very much an open question.

Initial claims not at cautionary levels yet

 - by New Deal democrat

Initial jobless claims are an important short leading indicator, typically turning up 3-9 months before a recession. A problem is the necessity of filtering out signal from noise.There are two ways I measure claims in order to do so: (1) how much has the less noisy four week average risen from its low? And (2) have initial claims, averaged monthly, turned higher YoY?

Let’s start with the first measure. A 10% increase off of an interim low in claims is not unusual, and has happened every year or two for the entire 50+ year period that records have been kept. By the time they are up 15% from their bottom, not only is it almost always a signal of recession, but frequently the recession is imminent.

To distill signal and still give reasonable warning, the caution signal I employ is a rise of over 12% from a low. Measuring so, we see that initial claims as of this week are up about +11.5% off their lows:

Note that I am discounting the previous few weeks because they were distorted by layoffs due to the government shutdown. The four week average now does not appear to have any special factors.

Next, here is the long view of initial claims YoY measured monthly:

In any given expansion, there is usually at least one month where claims are higher YoY. But if that happens for two months in a row, more often than not it has signaled that a recession is approaching.

Here is what all of 2018 plus the first two months of 2019 look like:

Note that the big distortion in claims happened at the end of January. Even so, on average January 2019 was lower than January 2018. But February saw more initial claims being filed on average than one year ago. Still, we won’t have a caution signal unless March also sees higher claims than March of last year.

The bottom line is that, while initial claims are close to the levels at which they would give a warning, they aren’t quite there at this point.