Condolences to BooMan

 - by New Deal democrat

One of the places I always stop by for political analysis is the BooMan Tribune.  Yesterday Booman's brother suddently passed away, and he is in mounring.

Blogs are easy places to bring out the worst in people (see just about any comment section).  It is important to recognize that there are real live human beings, with real feelings, behind those posts.

So, condolences to BooMan, and a hope that he will find peace again as mourning permits.

Weekly Indicators for October 19 - 23 at XE.com

 -by New Deal democrat

My Weekly Indicator piece is up at XE.com .

The changes were all positive this week, but the Big Story remains the effects of the strong US$.

Forecasting the Presidential election: simply knowing whether the economy is expanding or in recession gives you the correct answer more than 2/3 of the time

- by New Deal democrat

If you want a quick and dirty guide to whether an incumbent political party will retain control of the White House in a Presidential election, simply knowing whether the economy will be in expansion or recession in the 3rd or 4th quarter of the election year gives you the correct answer more than 2/3's of the time.

The NBER maintains the official list of US recessions going back over 160 years to 1854.  During that time, there have been 33 recessions, and 40 Presidential elections.  Eleven of those Presidential elections have taken place during a recession (measured by the 3rd or 4th Quarter of the election year).  

In only 3 cases has the incumbent party been successful maintaining control of the White House (and in one of those cases, the incumbent party's candidate lost the popular vote, but won in the Electoral College).  In the other 8 cases, the incumbent party lost, including at least 3 of the biggest political turning points in US history (1860, 1932, 1980).

Similarly, of the 29 times the economy has been expanding during the 3rd and 4th Quarter of an election year, the incumbent party has retained control of the White House nearly 3/4 of the time.

Here's the complete list:

Recession, incumbent party maintains control (3 elections):

1876 - Hayes (R, succeeds R Grant)*

1900 - McKinley (R re-elected)

1948 - Truman (D, elected)**

Recession, incumbent party loses control (8 elections):

1860 - Lincoln (R, replaces D Buchanan)

1884 - Cleveland (D, replaces R Arthur)

1896 - McKinley (R, replaces D Cleveland)

1920 - Harding (R, replaces D Wilson)

1932 - FDR (D, replaces R Hoover)

1960 - Kennedy (D, replaces R Eisenhower)

1980 - Reagan (R, replaces D Carter)

2008 - Obama (D, replaces R Bush)

Economic expansion, incumbent party retains control (21 elections):

1856 (D Buchanan succeeds D Pierce) 

1864 (R Lincoln re-elected) 

1868 (R Grant replaces R Johnson)

1872 (R Grant re-elected)

1880 (R Garfield succeeds R Hayes)

1904 (R Teddy Roosevelt elected)**

1908 (R Taft succeeds R Teddy Roosevelt)

1916 (D Wilson re-elected)

1924 (R Coolidge elected)**

1928 (R Hoover succeeds R Coolidge)

1936 (D FDR re-elected)

1940 (D FDR re-elected)

1944 (D FDR re-elected)

1956 (R Eisenhower re-elected)

1964 (D Johnson elected)**

1972 (R Nixon re-elected)

1984 (R Reagan re-elected)

1988 (R Bush succeeds R Reagan)

1992 (D Clinton re-elected)

2004 (R GW Bush re-elected)

2012 (D Obama re-elected)

Economic expansion, incumbent party loses (8 elections):

1888 (R Harrison replaces D Cleveland)

1892 (D Cleveland replaces R Harrison)

1912 (D Wilson replaces R Taft)

1952 (R Eisenhower replaces D Truman)

1968 (R Nixon replaces D Johnson)

1976 (D Carter replaces R Ford)

1992 (D Clinton succeeds R Bush)

2000 (R Bush succeeds D Clinton)*

*lost popular vote; decided in Electoral College

**predecessor of same party died in office

Bottom line:  while an ongoing recession at the time of the election does not always mean that the incumbent party will lose control of the White House, it spells DOOM by better than a 2:1 ratio.  

Similarly, while an ongoing economic expansion at the time of the election does not guarantee that the incumbent party will retain control of the White House, it has been a meant success by better than a 2:1 ratio.

UPDATE:  If we go by popular vote rather than Electoral College victory, then the elections of 1876 and 2000 fall into line, meaning that the  popular vote in fully 80% of all Presidential elections correlates positively with whether or not the economy has been in recession or not at the time of the election.

By the end of next week, all but one of the long leading indicators, designed to tell us 1+ year out whether the economy will be expanding or in recession, will have been reported for Q3, meaning that we should have visibility through the 3rd Quarter of next year.

September housing permits: a pause, but rising trend still intract

 - by New Deal democrat

I have a new post up at XE.com , taking a look at the trends in housing permits and starts.

Forecasting the 2016 election: the "gatekeeper" role of social and moral issues

 - by New Deal democrat

Tom Schaller made a convincing case in "Whistling Past Dixie" that in the South, moral and social issues are threshold issues, writing that there, Democrats "flunk the litmus test:"

Why do Democrats struggle so mightily in the South? ....  The short answer [ ] is that social and cultural isues tend to trump economic considerations for many voters in the South....

In other words, only candidates whose views on those issues are acceptable then get their economic positions considered.  In other words, a socially liberal Democrat with historically populist economic positions stands no chance in the Old South.

I think Schaller's analysis is more universally true than he considered, and is equally applicable to the left.  For example, in 2012 Huckabee had very populist anti-Wall Street positions.  Was there the slightest feeling on the left that he might be an acceptable GOP candidate?  Hell no!  Because of his position on social issues.  In other words, I think Dixie only stands out because its moral "screen" is half a standard deviation to the right of that of the relatively conservative Midwest or Mountain states.

In the last few weeks, we have had two more demonstrations of this "gatekeeper" role of social and moral issues.  Jim Webb, an economic populist with RW views on a number of social and foreign policy issues, got zero traction as a democrat and is considering running as an independent.

More importantly, look at what just happened in Canada.  The NDP was leading until its leader made comments about the Muslim face covering, the naqib.  At that point their poll numbers collapsed and their voters turned to the Liberals as an acceptable second choice even though apparently the Liberals are within the "neoliberal" economic mainstream.

BTW, historically this same tension has played out in countries like Mexico and in Europe, where RW parties come to power by highlighting socially unacceptable positions held by economically populist LW parties.

The bottom line is, there isn't just a trade-off between social and economic issues. Rather, voters will vote their pocketbook, but they will only vote their pocketbook from among those candidates who hold acceptable positions on social and moral issues.

Steven Hayward Continues the Long History of Powerline's Economic Stupidity

As I previously pointed out, Powerline has a long history of being 100% wrong on the economy.  From the "Fed is printing money so inflation will spike" garbage, to "the CRA caused the housing crisis" to the latest "Dodd Frank is crushing small business lending" meme,  these guys have not been able to get one thing right.

Steven Hayward continues that trend.  On October 8th, he argued that interest rates would spike because China was selling treasuries. He concluded:

The Fed may have to raise interest rates whether it wants to or not in order to get more suckers buyers for our bonds.

As usual, he was dead wrong.

The buying has been crucial in keeping a lid on America’s financing costs as China -- the largest foreign creditor with about $1.4 trillion of U.S. government debt -- pares its stake for the first time since at least 2001. Yields on benchmark Treasuries have surprised almost everyone by falling this year, dipping below 2 percent last week.

It’s not the scenario that doomsayers predicted would leave the U.S. vulnerable to China’s whims. But the fact that Americans are pouring into Treasuries may point to a deeper concern: the world’s largest economy, plagued by lackluster wage growth and almost no inflation, just isn’t strong enough for the Federal Reserve to raise interest rates.

“As you develop a more pessimistic view on global growth, inflation, and rates, asset managers are going to buy Treasuries in that environment,” said Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, which oversees $35 billion.

If anything, Powerline continues their long and solid history of being a great contrarian indicator.  Do the opposite of what they project and you'll make out like a bandit.

PS: I'm sure that Hayward will print a clarification any day now ...  

Forecasting the 2016 election economy: social issues + the long arc of history

 - by New Deal democrat

This week housing permits will be reported.  That will give us most of the long leading indicators for Q3, and that means we can begin meaningfully talk about whether things like GDP, employment, and personal income will still be positive in Q3 2016.  Since these are some of the better-rated economic indicators found by Nate Silver as predictive of Presidential elections, it also means we can begin to talk meaningfully about whether the incumbent Democrats or the opposition Republicans are likely to win the 2016 election.

But this is a good time to note that, to paraphrase Bill Clinton's famous slogan, "it's not *just* the economy, stupid!"  There are social and moral issues, and unless you think the Vietnam War, the Civil Rights Acts, Watergate, Willie Horton, the Lewinsky affair, and the Swiftboating of Kerry were irrelevant, I submit that they have had an effect on election outcomes.

If the sole determinant of an election were whether or not the economy is in a recession in the 3rd or 4th quarter of the election year, then Dewey would have won in 1948, Stevenson in 1952, Humphrey in 1968, Ford in 1976, Bush in 1992, and Gore in 2000.

Even adjusting to trend, almost all economic indicators weren't just positive, but *very* positive in 1968 and 2000. Humphrey and Gore shouldn't have just won, but won in a landslide.

So clearly the economy isn't the sole determinant of winning the Presidential election.

Probably the best analysis of the relative import of social vs. economic issues was contained in Thomas Schaller's "Whistling Past Dixie," the tome which forecast Obama's winning electoral coalition. Schaller wrote that, in Dixie, social issues are gatekeepers.  Candidates' views on the economy aren't even considered until they pass through a social "screen" of acceptability.  Schaller was writing from the Democratic point of view, but I suspect a similar dynamic plays out on the left.  If there were a candidate with Bernie Sanders' economic populist views, but right wing views on abortion, gun control, and gay rights, would progressives really be interested?  In 2012 GOP Gov. Mike Huckabee of Arkansas was pretty much that, and I recall zero interest in his candidacy by the left.

The bottom line is, I believe voters do in fact vote their pocketbooks, among those candidates whose views on moral or social issues they find basically acceptable.  Thus much effort is expended in campaigns to make the opposing candidate simply morally unacceptable.

Prof. Douglas Hibbs' "Bread and Peace" model takes at least one moral issue - war - and integrates it into his analysis, which makes use of the number of military casualties during a President's term. This method does at least partially explain Humphrey's loss, and subtracted at least a little from Gore's total (Serbia) and George W. Bush's and McCain's (Iraq and Afphanistan).

It is well beyond my competence to try to incorporate other "moral issue" into an election model.  It is simply well worth it to remember that such issues are important.  If the economy is going well, the opposition will focus on them.  If the economy is doing poorly, there is barely a need.

A second limitation of the model can be filed under "what have you done for me lately?" There is a line of thought that, after two terms of one party, there is an increase in voters restless for change, regardless of what the economy is like.  That certainly helps explain 1968 and 2000, but there aren't enough data points to enable reliable comparison.

That being said, it is certainly interesting that the concept of parties only lasting in power typically through two presidential terms is a relatively recent phenomenon.  In the long arc of US history, it is fair to consider the US as being a rising economic power from its inception through the 1940s, at its apogee in the 1950s and 1960s, and relatively speaking at least being a waning power from at least 1974 on.  Now let's compare against the frequency with which control of the White House shifted from 1800 to 1952:

Democratic-Republicans: 1800-28 (28 years)

Jacksonian Democrats: 1828-40 (12 years)

1840-60: multiple changes of power

1860-1884: Republicans (24 years)

1884-96: 3 changes of power

1896-1912: Republicans (16 years)

1912-20: Democrats 

1920-32 Republicans (12 years)

1932-52: Democrats: (20 years)

Since 1952, however, control of the White House has changed every 8 years with the exception of 1976-92, a single Democratic term followed by 12 years of GOP control.

While the US economy was in its ascendancy, voters were willing to trust a single governing party with control for long periods of time, switching when economic progress stalled.  Only the 20 years of turmoil leading up to the Civil War stand out as different.  Since the US economy reached its relative apogee, voters have behaved as if they felt the parties had no solution to the relative decline in their fortunes.

Although we probably can't measure it in any accurate statistical way, over the long term US voters are behaving as we would expect them to if they were voting on the waxing and waning of their economic well-being.

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Weekly Indicators for October 12 - 16 at XE.com

 -by New Deal democrat

My Weekly Indicator post is up at XE.com .

The employment picture is really coming into focus, in the context of the shallow industrial recession and inventory correction.

Inndustrial production ex-Oil Patch

 - by New Deal democrat

By now I'm sure you know that industrial production not only declined again in September, but has also failed to make a new high in almost a year.

But what happens when we remove mining and utilities, and focus on manufacturing?  Here's what happens:

Manufacturing (blue) continues to be in an uptrend, although it is slightly off (-0.3) of its high two months ago, which is actually pretty darned good considering the strong dollar.

Yes the US is in a shallow industrial recession. But it is focused and limited, and hasn't translated into any downdraft in the consumer economy (see: real retail sales) which is 70% of the total.

The JOLTS report for August continues to underwhelm

 - by New Deal democrat

I continue to be underwhelmed by the monthly JOLTS reports.  Most commentators focus only on the job openings number without paying attention to the pattern of this series during the 2002-07 expansion.

Here is the overall series since its inception:

As an initial matter, while this series looks extremely useful, because there is only 15 years of history, there is only one complete business cycle with which to compare.  During that cycle, hiring peaked well before job openings. As shown above, the peak in hiring (and the trough in voluntary quits, not shown) was the first signal that the expansion was decelerating.

Now let's zoom in on the last year:

Once again, while job openings have skyrocketed, actual hires have stalled.  It is only because August 2014 featured an anomalous decline in hiring that the Hires series has not turned YoY negative.

This suggests to me that (1) we are past mid-cycle, as many other series also show; and (2) there is a labor market disconnect, as employers are not filling a record number of openings.  As to why those openings are going unfilled, I have seen a fair amount of survey information where employers are complaining of not being able to find appropriately skilled candidates.  I suspect that there are one or both of two clauses missing in those sentences, as in:  "We are not able to find skilled candidates [for the wage we want to pay and/or because we refuse to pay for any on-the-job training]."

Again, this is an underwhelming report, but if the underemployment rate continues to decline, I anticipate that more and more employers will capitulate on increasing wages for new hires.

Sent from my iPad

Real retail sales show expansion past mid-cycle, but no oncoming recession

 - by New Deal democrat

With September inflation reported this morning, I can update one of my favorite series:  real retail sales.

First of all, real retail sales rose to a new high:

The YoY% growth in real retail sales in comparison with real personal consumption expenditures are an excellent mid-cycle indicator, since reliably the former is both declining and negative the latter before recessions begin, and further the former starts to underperform the latter at about mid-cycle.  Here's what they look like now:

There is increasing evidence that we are past mid-cycle.

Finally, let's look at real retail sales per capita.  These typically peak one year or more before the onset of a recession:

Although population has not been updated past July, since it has been growing at about .06% a month, and since real retail sales are up about .30% in the last two months, we have made another peak.  This is evidence that the economic expansion should continue at least through the 3rd quarter of 2016.

Real aggregate wage growth declines slightly in September, but trend continues positive

 - by New Deal democrat

In my opinion, the single best measure of a labor market expansion is real aggregate wage growth. People don't work just for the hours, or the jobs, but for the cold hard cash they can bring home and save and spend.  How much a growing economy allows them to do that is the best measure of the well-being it is delivering.

I call this the "lump of labor" approach, because sometimes, as in the 1980s and the first part of the 1990s, average wages are declining, but hours are expanding.  Sometimes, nominal wages are growing, but inflation-adjusted wages falter, as in the 1970s. In the present expansion, by contrast, nominal wages and real wages have grown slowly, and hours worked have grown strongly. The current expansion, as opposed to the expansions of the 1950s and 1970s, also gets bonus points for being long-lived.

Now that we know the September inflation rate, I can update this information.  Last month, nominal average wages for nonsupervisory workers grew very slowly.  Prices, however, fell by -.2%, meaning that real wages actually improved.  But aggregate hours work declined, meaning that aggregate real wages declined by -0.1%. Here is the long-term graph going back 50 years:

Real aggregate wages are now 16.8% above their recession trough of October 2009.  It is easy to see that this expansion does not measure up to the 1960s and 1990s, but far outpaced the George W. Bush expansion of 2002-07.

Here's how the current expansion stacks up in comparison to the Reagan expansion of the 1980s:

At this point, 5 years and 11 months after the bottom, the Reagan expansion was slightly better at 18.9%.  Note that about half of that increase came during 1983, whereas in the current expansion real aggregate wage growth started out slowly (as gas prices rose from $1.40/gallon to $3.95/gallon) and then picked up steam last year (as gas prices fell to less than $2/gallon).

As an aside, *if* real aggregate wage growth were to continue for 12 more months at its average pace for the last 6 years, past history going back 50 years strongly implies the democratic nominee will win the presidential election next year.

Q3 2015 update on corporate profits as a leading indicator for quarterly stock prices

 - by New Deal democrat

I have an updated post at XE.com .  If corporate profits are a long leading indicator, and stock prices a short leading indicator, then corporate profits should lead stock prices, at least when those prices are averaged quarterly.

With Q3 in the books for stock prices, where does this relationship stand?

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A thought for Sunday: in which I despair

 - by New Deal democrat

Over the last couple of years, more and  more blogs have closed down.  Sometimes, it is because the person has too many other obligations.  Sometimes, the person has just a few readers, but other great qualities. For example, the best political blogroll I ever encountered was at Frank Chow's now-closed blog.  Recently he made access to the blog private, so even that is gone. 

I admit that I too am close to despair.  In the first place, the economy has been kind of boring in the last couple of years.  At or near mid-cycle, as I have often said.  Beyond that, I frequently feel like I am shouting into the vacuum of the Oort cloud at the long-term deterioration I have increasingly seen over my lifetime.  We didn't use to have wage stagnation.  We didn't use to have an increasingly desperate middle class. We didn't use to have near-daily mass shootings. We didn't use to have a crumbling infrastructure (I have taken to calling the traffic reports in my area the "failing infrastructure report" because all too often a bridge or a rail line or traffic lights or just congestion that was not planned for is the cause of problems).

Worse, the solution from the dominant faction of the Democratic Party is weak-tea rim-shot free-market tweaks.  The solution from the GOP is always to double down on the insanity.  

According to one of the best political books I have ever read, "Whistling Past Dixie," showed, based on reams of polling data, that white working class voters in that region -- unlike such voters in any other region -- treat candidates' positions on "social issues" as a filter.  If a candidate does not make it through that screen, their economic positions don't matter.  Significantly, the reactionary views in that region coincide with the first major immigration into the region -- of Latinos and relocated Yankees -- in 400 years.  The old social order of the descendants of largely Scotch-Irish whites at the top, and the descendants of African slaves beneath them, is being profoundly shaken.

Just this morning, I read an article where struggling South Carolinians are interviewed about stagnant wages.  They all acknowledge the problem, and are angry about it.  

Economic despair is a potent political force. . . .

[When]  you listen to indignant voters[, d]espite the still nascent recovery, a huge number of people in the middle and lower classes say their wages have not budged in years. 

And what was their mindset?  What did they see as the solution.  Here's a sample:

[T]o prosper, the economy has to prosper,” Mr. Lewie said, “and it’s the rich people that produce jobs.”

When asked to assign blame for stagnating wages, he and his wife pointed to the federal government. Regulations and high taxes, he said, not lower wages abroad....

The operative definition of insanity.

Never mind that since at least 1981 we have gone down this road of increasing wealth at the very top, increases in corporate profits, and Federal *DE*regulation.  The results are pretty damn evident if you are not self-blinded.

If it were up to me, countercyclical programs would always be in place, ready to be activated in any downturn. A WPA and CCC would always be on the books.  Infrastructure projects would always be in the hopper.  At 6% unemployment, the projects would automatically be prioritized.  At 7% unemployment, the administrative positions in the WPA and CCC would automatically be filled.  At 8% unemployment, the workers would be hired and the projects started, at pre-set levels of GDP.  The agencies would be automatically wound down as the unemployment rate fell.

Similarly, automatic tax breaks, weighted towards consumers, should be in place, taking effect quarterly or at very least annually as unemployment increased, and then automatically and gradually reversed as unemployment decreased again, with an eye towards running a surplus once an economic expansion were well-established.

All of which would hardly have been a pipe dream in my youth.  One can easily imagine a Lyndon Johnson or a Robert F. Kennedy or one of many other New Deal democrats proposing such a system.  But no more, and certainly not with one party dominated by an adamantly opposed Dixie, and the other dominated by an elite of neoliberal milquetoasts.

I used to say that politically the US has shifted 1 standard deviation to the right since then.  I no longer believe that.  The US is now *2* standard deviations to right of where it was 50 years ago. We have a Supreme Court one vote shy of dismantling the 20th Century, and they don't have much respect for the post-Civil War Amendments either.  We have a strident minority in the House of Representatives that thinks it would be cool  not to pay the bills that they have already incurred on behalf of the US.  We had a GOP President who endorsed torture, saturated surveillance that police can access without a search warrant, and tax rates that could not possibly fund the fiscal obligations of the country. We now have a Democratic President who has made all of these positions permanent.  These are now bipartisan positions.  Johnson and Kennedy would be treated as beyond the pale now.

In 2008, a majority of the country was ready for significant change.  It got Obamacare and not much else.  Instead, Obama co-opted and then defenestrated the netroots Progressive movement. So, 2008 was a "failed turning point," after which, as in 1989 Tiananmen Square, or 1848 Europe, the reactionary elites double down. 

As bad as things are now for the middle class, the next recession is out there.  I am terrified that when it comes, wages, which have only been up 2.5% YoY at their very best during this expansion, will go into outright deflation, opening the door to a wage-price deflationary spiral.  In other words, unless policies are changed, the next recession is likely to be even worse than the last one.

In the meantime, especially if Hillary Clinton is the democratic nominee, the best available choice is going to be more reformist neoliberal nibbling around the edges.  That means there is no real chance for economic progress until 2020, and maybe even 2024.  And I am not immortal.  I think I will die in a US which has turned into a Latin American-style plutocracy, a land of profoundly unequal and stultified opportunity, with no prospect of a turnaround in sight.

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Weekly Indicators for October 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicator piece is up at XE.com.

The US data got just a skosh weaker.

Whilesaler inventories and sales show shallow industrial recession ongoing

 - by New Deal democrat

I have a new post up at XE.com.  The shallow industrial recession is real, and is not abating yet.

Ruh roh: Labor Market Conditions Index forecasts further deterioration in monthly jobs growth

 - by New Deal democrat

As I wrote several months ago, the Labor Market Conditions Index is a good leading indicator for YoY growth in employment.  Based on its deceleration, I forecast that monthly jobs growth was likely to decline to less than 200,000 in the months ahead.

Here's the graph I ran at that time:

The LMCI was updated earlier this week, and the news isn't good, with the Index coming in at zero.  So here is an updated look at the same relationship, zoomed in on the last 10 years:

The LMCI is forecasting further YoY deterioration in jobs growth.  Even a few 5-digit increases cannot be ruled out.  The silver lining is, it is not forecasting an outright YoY decline in jobs.  Similar periods of weakness occurred in 1984, 1994, and 2002 without there being a recession. Even in those periods leading up to recession, generally speaking the LMCI crossed zero into negative territory well before the recession began.

Bottom line:  not good news, but this expansion isn't Doomed yet.