Weekly Indicators for February 8 - 12 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com .  Lots and lots of "less worse."

The consumer is alright

 - by New Deal democrat

[Updated with graphs]

This morning's retail sales report gives us confirmation that the consumer economy - about 70% of the entire US economy - is alright.

While we don't know what the CPI for January is yet, we do know that gas prices continued to decline smartly, so I am not expecting a number over +0.1%, and truth be told, I am not expecting a positive number at all.

Not only was January a positive both including and excluding autos, but December was revised significantly higher, from -0.1% to +.2%.

Here is a graph for nominal (blue) and real (red) retail sales:

For what it's worth, YoY real retail sales for January will probably wind up near +2.5%:

 since last January's decline of -0.3% in retail sales falls out of the comparison:

Here's the bottom line:

1..Workers/consumers have more jobs, and are making and spending more money.
2.  Producers of commodities, and utilities and transporters of commodities are experiencing a very intense downturn, that so far has not dragged down non-commodity industrial production at all.

The story on real wages: four measures showing actual improvement

 - by New Deal democrat

In the last several years, I have written a number of posts documenting the stagnation in average and median wages, for example here and here.  Courtesy of the crash in gas prices and the decline in underemployment below 10%, there has been a change in the last 16 months.

We have a variety of economic data series to track both average and median wages:

• The most  commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full time workers each quarter. 
• The BLS also measures the Employment Cost Index quarterly.  
• The BLS also measures "business sector real compensation per hour" quarterly. 

All of these have now been updated through the fourth Quarter of 2015.  Let's take a look at them.

The first graph tracks monthly average (mean, not median) hourly wages (blue), median wages from the employment cost index (red), real compensation per hour (brown), and median usual weekly earnings (green). All are adjusted for inflation.  Since the quarterly index of median wages only started in Q1 2001, I have normed the indexes to 100 at that time:

Here is the same information YoY:

"Real usual weekly earnings" is now equal to its highest level since the beginning of the Millennium. The other three are at Millennium highs (as far back as two of them go).  Real average hourly earnings can be calculated back 60 years.  It is at a new 35 year high -- but still lags behind its high point in the early 1970s. And there has been an acceleration in growth in the last year.

Finally, via Doug Short Sentier Research's most recent monthly measure of median real household income also was positive:

I don't want to oversell this improvement.  It is still not nearly good enough to have a viabrant middle class.  But it does represent a significant positive.

Powerline Economic Analysis: Continuing Their Clue Free Ways

     In a post titled "Talkin' Unemployment Blues" Scott Johnson of the Powerline Blog referenced the following chart from "Shadowstats:" 

So, according to Shadowstats, the real unemployment rate is about 22.5%.  This stands in stark contrast to the U6 and U3 rates of unemployment from the BLS:

     For the sake of argument, let's assume SS is correct.  Wouldn't that mean there could be no wage pressure at all?  At that level of unemployment, employees have, literally, no bargaining power.  An employer could say, "there are, literally, 100 people who will take your job."  Yet, as the following chart from the FRED database shows, wages have increased about 2% Y/Y for most of this expansion.  That pace increased a bit over the last 6-9 months, and is now around 2.5%:

I wonder how Mr. Johnson would explain that rather glaring logical inconsistency?  

     This is but one of the many problems with SS numbers.  According to SS, their "alternate" CPI index based on 1980 calculations is ~7.5%.  If that were really the case, the 10-year would now be trading at a -5.75 yield.  (Just to help Mr. Johnson out: the current 10-year CMT was 1.75% at the close of yesterday's trading.   1.75 - 7.5 = -5.75%.  In case you were wondering, that's called "subtraction" which is a basic mathematical function.)  Trust me on this one: if the 10 year were trading at 5.75%, you'd be hearing about it.

     Here's the point.  The guys at Powerline aren't clueless; that description might imply that, at some point, they had a clue.  No: Powerline's writers are economically clue free.   Over the last few weeks, I pointed out that John Hinderaker -- who is now in charge of a conservative think tank -- thinks Minnesota should change economic policies.  This, when the state's unemployment rate is below 4% and wage gains are between 2.5%-5% Y/Y.  And now Scott Johnson is partially basing his argument on Shadowstats -- a website used by, quite literally, no reputable economist.  And this is before we consider that these guys spent the entire 2014 blog year providing economic commentary that was, literally, 100% incorrect.  That's just dumbfounding.  

     This post will have no impact on Powerline.  They'll continue to argue that they are economic geniuses.  And we'll be here to document the latest economic missive from the cluefree crowd at Powerline as they post.

     

      

The big trends of 2015 look like they are breaking down

 - by New Deal democrat

I have a new post up at XE.com .  A whole bunch of important data series moved pretty much in lockstep in 2015.  In the last month, that has broken down.

Labor Market Conditions Index forecasts further job softness

 - by New Deal democrat

Last summer I wrote that the Labor Market Conditions Index, a measure based on 19 components which was just reported just barely up +0.4 for January, was a useful addition to the forecasting toolbox.

Sprecifically, it has a 40 year history of signaling a turn in the economy.  Here is the entire history of the index: 

The index has with one exception (1981's double-dip) always failed to make a new high for at least 12 months before the next recession, sometimes much longer than that.  Further, it has always dropped below 0 and stayed negative for 6 months or somewhat more before the onset of the next recession.

Here is the Index over the last 5 years:

The Index appears to have made its cycle high at the beginning of 2012, with a secondary high in early 2014. But it has not turned negative.

Further, when the Index consistently leads the YoY% growth in jobs by 6 - 12 months, but YoY job growth (red) is a much  smoother measure:

Thus job growth serves as an important confirmation for the long leading part of the Index.

But a downturn below 0 in the LCMI, even partnered with a downturn in the growth of YoY jobs, hasn't always meant recession, as in the 1980s and 1990s.  That's where interest rates come into play.  In the 1980s and 1990s, as shown in the graph below (green), a marked increase in interest rates led to the declines in both the LMCI and YoY job growth.  

When that upturn in interest rates abated, the LMCI, and jobs, came back.  It was only when both weakened to the point where the LMCI was consistently negative, before interest rates declined, that a recession ensured.

Here is the same information for the period 2000 - present:

While the "taper tantrum" in interest rates briefly put a dent in the LMCI and YoY job growth, interest rates have calmed down since. In other words, more confirmation that we are probably past mid-cycle, but no imminent threat of an actual downturn.

On the negative side, since the LMCI does lead the much smoother YoY growth in jobs, it strongly suggests that YoY payroll growth is going to decline over the next 6 months or so.  

Six months ago I wrote that such a declien could "only happen if those payroll numbers generally come in under 225,000, and probably even below 200,000 through next winter." 

So here is jobs growth for the last 12 months:

Average growth for the last 6 months has been 218,000 per month. with 3 months upnder 200,000.

The LMCI forecasts that the decelerating trend in job growth will continue, which means I expect average jobs growth during the next 6 months to continue to average under 225,000.

Just When You Thought The Boys At Powerline Couldn't Become More Economically Incompetent ...

     I have a confession: the boys at Powerline utterly fascinate me.  On paper, they are smart guys: all of them are ivy league educated and all are lawyers with a large national firm.  And I'm sure that, if you needed a top-notch commercial litigator out of Minnesota, one of these guys would be on the list to call.

     But these guys just can't get anything right when it comes to economics.  I mean nothing.  You'd think that after making nothing but erroneous calls for an entire year, they'd call it quits.  But, you'd be wrong.

     The latest missive is from Scott Johnson, titled, "Talkin' Unemployment Blues."  Here's the opening paragraph:

President Obama made an appearance in the White House press room on Friday to take a victory lap over the fall of the official unemployment rate (U-3) to 4.9 percent (video below, about 15 minutes). Is that number for real? Referring to the hell he saw tending to wounded men during the Civil War, Walt Whitman held that “the real war will never get in the books.” By the same token,I wonder if the real unemployment will ever get in the books.

That's right.  At the beginning of his term, when the financial world was literally collapsing around him, Obama secretly fired the entire staff of the BLS so they could cook the statistical books.  That's why the unemployment rate climbed for the first few years of Obama's term, finally hitting 10% in 2010.  Then, the rate moved lower for the remainder of his term.  If he's going to hire people to manipulate the data, you'd think they'd do a better job than a gradual rate of decline.

     But that's not the best part.  Next, Johnson quotes Shadowstats.  Yes, he actually relies on data from Shadowstats.  Johnson even uses a graph from the website that shows a "real" unemployment rate of about 22.5%.  Note to Mr. Johnson: SS was debunked about 8 years ago by James Hamilton (a leading economist, BTW) and the BLS.  In quoting SS, you've basically demonstrated that you have no idea what you're talking about.

     But using SS isn't the best part.  The best part is Johnson links to a report from the St. Louis Federal reserve on the labor force participation rate (LFPR).  Here's that report's conclusion:

The BLS projections show the LFP rate continuing its decline, reaching 62.5 percent in 2020 (using the 2010-2020 medium-term projection). Since 2000, the BLS has projected the long-term decline in the LFP rate, indicating that the high LFP rate that we saw in 2000 might be a figure of the past. In particular, the decline in women's LFP since 1999 is not expected to reverse. The BLS does not expect the large decline in the LFP rates for the youngest group, 16-24-year-olds, to reverse either. To the extent that the decline for the youngest group is due to the time spent at school, it is possible that these workers will show a higher labor force attachment once they are out of school.

In other words, the reports shows that: demographers and statisticians have known about this decline for some time.  They have also studied it and can explain it.  While Johnson thinks the report bolsters his credibility, it only shows that he's clueless.    As in totally clueless.

     Memo to Powerline: econ is not your thing.  It's really not.

 


   

The problem with YoY measures, and a compensating rule of thumb

 - by New Deal democrat

There is a serious problem with simple YoY measures:  they miss turning points.  By the time a YoY measure has changed from positive to negative, or visa versa, the turning point is usually long past.

A good example of this turned up last week in a discussion by Mike Shedlock of jobs reports.  He posted the following graph of the YoY% change in jobs:

and made the following comment:

Jobs are a horribly lagging indicator. Recessions invariably start with the economy adding jobs as noted by the red squares in the above chart....  The peak of the job losses in most recessions is after the recession is over.

Now, I don't mean to pick on Shedlock.  As I have frequently pointed out, even though I disagree with him at least 80% of the time, I appreciate that he always dives into the data, and makes me think.

But as to jobs, the fact is, especially when going into recessions, they don't lag at all (although they have lagged somewhat coming out into the last 3 "jobless recoveries"). The BLS seasonally adjusts the monthly jobs numbers, and when the monthly seasonally adjusted numbers turn from positive to negative, that almost always coincides with the onset of recession.  Because there is a lot of month over month noise, I have averaged the numbers quarterly in the two graphs below covering the last 60 years:

Here is a close-up on the last 2 recessions, with monthly rather than quarterly numbers:

The bottom line is, when we have monthly or quarterly seasonally adjusted data, that is what we should use.  Waiting for a YoY number to turn positive or negative will just cause you to miss the actual turning point.

But frequently there is no choice, because there is no seasonal adjustment.  Most of what I report in my "Weekly Indicators" columns has this issue -- for example, consumer spending measures, the Daily Treasury Report, and rail traffic.

To not miss turning points, I use a rule of thumb:  if a series has improved/declined 50% or more from its best/worst YoY measure (adjusted for inflation if necessary), it has probably made a top/bottom, and turned.  It's not exact, but it is much better than waiting for the YoY number itself to turn. Whether the turning point using this rule of thumb is a little early or a little late depends on whether the turning point is U-ish or V-ish (inverted for tops).  If it is U-ish, the rule of thumb probably leads some.  If V-ish, the rule of thumb probably lags.

For example, the YoY measure of jobs tends to have inverted U-ish tops, and V-ish bottoms.  Applying my rule of thumb to the last 7 recessions, YoY% job growth declined 1/2 off its high 5 times before the actual onset of recession, with a median lead of +3 months.  The 1/2 YoY% of job grain off the bottom lagged each time, with a median lag of -8 months. (When it comes to jobs, the bottom of the V tends to coincide with the month the recession ends!

Thus recently I have been watching a number of indicators that have turned "less bad:"    rail traffic, steel production, and temporary staffing. I am also watching two that have become somewhat "less good:"  tax withholding and gas usage.

In re rail traffic, I also read an article last week that said we were heading into recession because of the big decline in YoY traffic, using this graph:

But note that YoY rail traffic bottomed in early 2009. It was about 1/2 the way back towards positive territory by October 2009.  Waiting for it to turn positive meant you would wait until early 2010 (in real time Shedlock made this exact mistake!).  At its recent worst, rail traffic was off about -20% YoY.  If it declines to less than -10% for about a month, that will strongly suggest that the bottom of the industrial recession has been made.

Hint: if your yield curve model says the US was at high risk of recession in the 1960s and 1990s, your yield curve model is crap

 - by New Deal democrat

I caught this over at Zero Hedge.  Since I can't find the original source online, it apparently started out in a private presentation by Dominc Konstam of Deutsche Bank.

It purports to show a "modified" yield curve that takes into account the fact that Fed funds are stuck at or near the zero lower bound, and this "modifieid" yield curve shows we are at near 50% risk of a recession.  Here's the graph:

Yesiree, it certainly does show that.

It appears to be close to an inverstion of the difference in the 10 year vs. 5 year yield on US treasuries, which is similar and shown in red below:

Here's the problem.  Cast your eye to the left end of the graph, the 1960s.  You know, probably the best economy the US has had since, well, forever?  What does the graph show then?

Apparently, the US was teetering on the edge of recession throughout the entire decade.  Hoocudanode?!?

Next look towards the middle. There is the 1990s tech boom, second only to the 1960s as the best US economy of our lifetimes.  Well, apparently the US was teetering on the edge of recession through that period as well!

So here is a helpful hint.  When your Killer App for Foreceasting Recessions, forecast a recession during the two best economies that the US has had in the last 60 years, your Killer App is Crap.

US Bond, US Equity and International Week in Review

These are over at xe.com

International Week in Review

Bond Market Week in Review

US Equity and Economic Week in Review

Weekly Indicators for February 1 - 5 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at at XE.com .  The big news this week was what happened to the US$.

Ed Morrissey Should Really Stop Writing About Economics

     Y'know ... Ed Morrissey of Hot Air is consistent.  For the last 8 years (which, interestingly enough, corresponds with the Obama presidency) Ed has reported that the economy has been terrible -- just terrible.  Ed will take any statistic that has the potential for negative spin, and do just that -- spin it as negatively as possible.  I knew when the headline employment number came out, Ed would be all over it. And, sure enough, he printed "Meh: US added 151,000 jobs in January" within hours of the BLS release.

     First of all, let's look at Ed's actual qualifications to write about this topic.  Does he have any meaningful economic background or is he simply a blogger with a strong political angle?  Here's a link to his Wikipedia page, and the answer is "no" on the qualification question.  There is no mention of a college major or minor in econ (in fact, there is no mention of any higher education), nor is there any mention of a job in finance.  Econ isn't something you can teach yourself.  Most of the people at the Federal Reserve and in financial services are at least econ minors.  Most, in fact, are CFAs and Ph.Ds.

     Most of Ed's story is your standard "cut and paste" job, meaning there is little actual self-produced analysis.  What is "original" is this specific mentions of "underemployment:"

Numerous news services heralded the a drop in U-3 rate of unemployment to 4.9%, but the number of people not in the workforce also rose by 360,000 people from last month (table A-16). That follows an increase of 284,000 the previous month. Those not in the labor force who want a job increased by 461,000, and that follows an increase of 379,000 in the previous month. The latter measure had been falling in 2015, but has reversed itself by 840,000 in two months — both in the 0.7%-growth-rate Q4.

Ed is one of the many people who, over the last few years, found the labor force participation rate. More specifically, he noticed it was dropping.  However, let's take a look at the longer trend:

     
Somehow I doubt this graph was even on Ed's radar during the Bush years when it started dropping. However, the pace of acceleration has increased since the end of the recession.

This leads to two questions: why did it increase and why is it decreasing?  It started to rise for two reasons: women entered the labor force and the baby boomers hit their peak earnings years.  Why is it declining now?  Well, there's actually been a ton of research on the topic (done by people who actually have a background in econ).   Interestingly enough, Ed has yet to link to any solid research on the topic.  Invictus over at the Big Picture blog has got a great set of links on the topic here.  Here's the general conclusion:

At least 50% (and probably more) is caused by retiring baby boomers.

Then there's the huge drop in working teenagers, largely because they're in school (which is a good thing -- y'know -- they're learning):

The increase in life spans means some people keep on working because they like it.

There is a percentage of people ages 24-54 (the prime working age) that have left the labor force.  Most of them are people with a high school or less educational level who used to work in blue collar industries who have been left behind due to globalization and automation.  
   
These data points aren't on Ed's radar screen.

So, here's the real story.  Economists and demographers have known about the LFPR drop for some time.  There has been a ton of scholarly, well-researched articles on the topic.  And their general conclusion is most of the drop can be explained through reasoned analysis and explanation.

In addition, Ed Morrissey is completely unqualified to discuss or write about economics.  There is nothing in his background to indicate he understands the nuances of the science and he's obviously more interested in creating negative political spin than actionable intelligence.  He has yet to post any link to a scholarly article on economics or the markets, instead posting excerpts from news storiees.

This of course won't stop him from writing on econ.  He (unfortunately) suffers from the Dunning Kruger effect.  And his readers will certainly learn nothing meaningful from his "analysis."  All we can do is keep a public record of his gross incompetence in the hopes he will eventually discontinue his efforts.

January jobs report: an hours, wages, and participation surge under the headlines

- by New Deal democrat

HEADLINES:

• 151,000 jobs added to the economy
• U3 unemployment rate down -0.1% to 4.9%

With the expansion firmly established, the focus has shifted to wages and the chronic heightened unemployment.  Here's the headlines on those:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 87,000 from 5.886 million to 5.973 million
• Part time for economic reasons: down 34,000 from 6.022 million to 5.988 million
• Employment/population ratio ages 25-54: up +0.3% from 77.4% to 77.7% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 from $21.27 to $21.33,  up +2.-%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.)

November was revised upward by 28,000.  December was revised downward by 30,000, for a net change of -2,000. 

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

• the average manufacturing workweek rose from 41.6 hours to 41.7 hours.  This is one of the 10 components of the LEI and will be a positive.
 
• construction jobs increased.by 18,000.  YoY construction jobs are up 264,000.  
 
• manufacturing jobs increased by 29,000, and are up 45,000 YoY.

• Professional and business employment (generally higher-paying jobs) increased by 9,000 and are up 620,000 YoY.


• temporary jobs - a leading indicator for jobs overall decreased by -25,200.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by -156,000 from 2,405,000 to 2.249,000.  The post-recession low was set 5 months ago at 2,095,000.

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

• Overtime was unchanged at 3.3 hours.


• the index of aggregate hours worked in the economy rose by 0.4 from  104.9 to 105.3. 
 
• The broad U-6 unemployment rate that includes discouraged workers was unchanged at 9.9%.

•  the index of aggregate payrolls rose by 0.9  from 126.9 to 127.8.

Other news included:      

• the alternate jobs number contained in the more volatile household survey increased by 615,000  jobs.   This represents an increase  of 2,440,000  jobs YoY vs. 2,665,000 in the establishment survey.  
 
• Government jobs fell by -7,000.  

• the overall employment  to  population ratio for all a ges 16 and above rose by .1 to 59.6  m/m and +0.3% YoY.  The labor force participation rate rose  0.1% from 62.6%  to  62.7%  and is down -0.2 % YoY (remember, this incl udes droves of retiring Boomers).  

 SUMMARY:  

The headline employment number was a little light this month, but look at the great internals:

• average wages rose smartly
• aggregate hours also rose smartly
• wages and hours for December were revised upward.  This means that real aggregate wages had a big increase, probably over 1% in just one month.
• part time for economic reasons declined
• the employment population ratio for prime working ages 25 54 rose by 0.3% and has finally made up more than 1/2 of its loss from the Great Recession

There were only a few negatives:

• the broad U6 unemployment rate did not fall
• those not in the labor force who want a job now rose
• temporary jobs fell

Bottom line:  January was a great month for workers' paychecks. Finally!

Forecasting the 2016 election economy: it turns out consumers really do vote their wallets

 - by New Deal democrat

For the last 7 months, I have been engaged in a real-time experiement to see if I could use economic indicators to forecast the outcome of the 2016 Presidential election well in advance.

In previous installments,

• I've examined the best coincident measures of the Election Day economy found by Nate Silver.
• I've examined the correlation between housing permits, a long leading economic indicator, and those coincident indicators.
• I've examined the "Bread and Peace" model which makes use of real disposable personal income as a decisive economic indicator (in the past 20 years, it has not fared so well, especially in 2012).
• I've compared 160 years of election returns with NBER recession dates to conclude that whether or not the economy is in recession in the 3rd Quarter of the election year has forecast the outcome of the popular vote 75% of the time.   
• I have made a preliminary forecast that the democratic nominee is likely to win the election, based on the general positivity of the long leading indicators through October 2015.

One of my favorite economic indicators, however, is real retail sales, measured in the aggregate and per capita.  And lo and behold it has one of the best correlations of all with Presidential election results.  It turns out consumers really do vote with their wallets. It is considerably better than using income, probably because it is the acid test of the level of confidence average people have about the economy. As a result, how much of what is in their wallets they are wiling to spend is an excellent predictor of their voting preferences in Presidential elections.

Specifically, during the last 60 years, the following statements have always been true and have collectively always accurately predicted the outcome of the Presidential elections.

1. If there is no consumer spending recession, defined as at least 2 consecutive quarters' decline in real retail sales per capita, during a Presidential term, the candidate of the incumbent party wins the Presidential election.
2. If there is a consumer recession, and consumers are spending less per capita at the end of the third quarter of the election year than they were 3 years previously, then the candidate of the incumbent party loses the election.
3. If there is a consumer recession during the final two years of the Presidential term, the candidate of the incumbent party loses, even if consumers are spending more at the end of the third quarter of the election year than they were 3 years previously.
4. If there is a consumer recession during the first two years of the Presidential term, but the consumer has completely recovered (which has always happened), the candidate of the incumbent party wins the election.

Here is a table giving the breakdown of real retail sales per capita, ranked in order of strength from Q3 of the first year of the Presidential term through Q3 of the final year of the term, a total of 12 quarters.  I begin with the third quarter of the President's first year in office since voters historically excuse the President for responsibility for the economy until s/he has been in office at least 6 months.

The last two columns indicate whether or not a spending recession, defined as two consecutive quarters of a decline in real consumer spending per capita, occurred during the Presidential term.  If so, I indicate whether that spending recession ended, and if so, when:

Year	Real  retail sales per capita	Incumbent  party vote %	Spending recession?	Recovery from spending recession?
1964	11.8	61.3	None	---
1972	11.4	61.1	Yr1 m10	Yr3 m1
2012	7.7	52.0	None	---
2000	7.4	50.3	Yr4 m3	No
1996	6.6	54.7	None	---
1956	5.1	57.8	Yr1 m3; Yr 3 m10	Yr3 m3, No
2004	4.8	51.2	None	---
1984	4.8	59.3	Yr1 m8	Yr3 m6
1988	4.6	53.9	None	---
1968	2.2	49.6	Yr2 m3	Yr4 m11
1960	-2.1	49.9	None	---
1976	-2.8	49.0	Yr1 m7	No
2008	-5.9	46.3	Yr2 m1	No
1980	-6.1	44.7	Yr2 m12	No

 In general, the stronger the growth in real consumer spending during the 3 year period leading  up to the Presidential election, the higher the percentage of votes for the candidate of the incumbent party.  Further, every time consumer spending growth was negative, the incumbent party's candidate lost.  Every time the consumer spending growth was over 4%, the incumbent party candidate won.

At present were are 9 quarters into the 12 quarter period for the 2016 election.  Real retail sales per capita are up 3.2% since Q3 2013.  If they continue at that pace through Q3 of 2016, they will be up 4.3%, forecasting a win by the Democratic candidate.

Secondly, when consumer spending growth during the three years leading up to the Presidential election was weakly positive (i.e., 4% or less), there was always at least 1 consumer spending recession.  Whether and when the recovery from the downturn happened is vital. If it happened early in the term, the candidate won.  If it happened late in the  term, specifically including the last year before the election the candidate lost.  [Note that while in 1956, such a recession was ongoing at the time of the elction, the overall spending increase for the term was +5.1%.] Probably a weighted average where periods closer to the election get more weiighting than earlier periods would be an improvement in the model, but it is beyond my scope.

In 2015, real retail sales per capita did decline ever so slightly from Q3 to Q4 in 2015.  A one quarter decline is not unusual at all.  If, however, it continues to decline, that will be consistent with a scenario similar to that in 2000, where the candidate of the incumbent party, Al Gore, lost the election although he eked out a slight victory in the popular vote.

To summarize, if consumers vote their wallets this year,  the democratic nominee is likely to win, provided there is no spending recession over the next 8 months.  

My forecast for the 2nd half of 2016

 - by New Deal democrat

My forecast for the 2nd half of this year is up at XE.com.  US$ permitting . . . .

Another sign the industrial recession is bottoming: ISM inventories vs.new orders

 - by New Deal democrat

The overall most important economic question this year is whether the industrial recession caused mainly by the strong US$ will end, and if so, when?

I have suggested that there are signs of a bottoming out in the spot price of the trade wieghted US$ and industrial commodity prices.  Yesterday we got a third indication in the ISM manufacturing report.

As an initial matter, the inventories component of the ISM index is an excellent coincident indicator for YoY real GDP.  Here are three graphs covering the last 70 years to show that:

Besides being a more timely sign of a Quarter's GDP,  as you hopefully can see in those graphs, the ISM inventories index also  bottoms out sometime between the middle of a recession to a few months after its end.  Most often the bottom is wihin one month of the bottom of the recession.

The inventory index in 2015 made a bottom in October.  Usually - but not always - there is no lower bottom.

Just as important is the relationship between the ISM new orders index and the inventory index. As you can see in the below graphs covering the last 70 years, typically late in a recession the new orders index spikes higher, into expansion,  while the inventories index is still contracting, near the index's ultimate low:

The same pattern holds true for downturns that do not sink all the way into recession.  Here is 1966:

and here is 1985-86, which was also associated with a steep decline in gas prices:

Now here is a close-up on the last few years:

In January the ISM new orders index spiked higher, into expansion,  while the inventories index remained near its low, showing continued contraction in inventories.

Typically both new orders and inventories make V-shaped bottoms.  While it is only one month's data, January is most consistent with new orders exiting the industrial recession, with inventories continuing to contract, but perhaps less intensely, in the next few months.  In short, more evidence of an approaching bottom to the industrial recession .

Consumers have spent about 20% of their gas savings

 - by New Deal democrat

Real personal consumption expenditures rose 0.1% in December, positive but something of a disappointment  compared with the big YoY increase evident in Gallup's consumer spending measure:

This means that personal spending slowed down considerably in the 3rd and 4th quarters compared with the previous 4 quarters (blue in the graph below), particularly as compared with the increase in real personal income (red):

But a longer term comparison shows that it has been the first 3 quarters of 2015 which were the exception:

Over the last 10 years, real personal spending increased on average about 0.15% monthly.  In the first 3 quarters of 2015, it increased by closer to 0.3% monthly.  This was one of the best rates in the entire 10 year period:

Real personal income (red in the above graph) also was above average throughout 2015.

So how much of their gas savings have consumers been spending?  The big decline in gas prices began in summer 2014.  If we norm both spending and income to 100 just prior to that decline, we can compare how much each has increased:

Real income has grown by 6%, while real spending has grown by 4.5%.  In other words, consumers have spent about 3/4 of their increase in income.

But how much of that is gas savings?  In the bar graph above, we can see that in the 12 months before the big decline in gas prices, real income increased by 2.4%, and real spending by 2.7%.  The average annual increase in income has been 3.9%, while spending has averaged 3.0% annualized.  This means that consumers have spent about 20% of their gas savings (+0.3% vs. +1.5%), relatively more in the first half of 2015 vs. the last half.

John Hinderakar Continues His Long Period of Economic Incompetence

Update: Let's think about this:  As I show below, Minnesota is at full employment with solid, state-wide wage gains above the national average.  And Hinderaker thinks that's bad.  What an idiot.  

John Hinderaker is now the President of the Center of the American Experiment, a think tank.  First, it's obvious his new bosses didn't even look at his past work.  As I've documented, his economic analysis was 100% wrong for an entire year (2014) .

Over at his website, he has a 30 second video up, arguing that Minnesota is actually 30th in job creation.  However, there's a big problem with Hinderaker's cute little video: he's using 2004-2014 as the basis for comparison.  No reputable economist would use that time frame instead, opting for the period of expansion as determined by the NBER.  Why?  Because that's the standard time unit we use in the profession.  Hinderaker's time period is simply pulled out of thin air, probably because it offered a the worst possible performance to "bolster" his claims.

Now, let's go the FRED system to get the data for Minnesota:

The Minnesota unemployment rate peaked a little above 8% at the end of the last recession.  It currently stands below 4%.  Economists generally consider 5% as full employment, which means Minnesota is doing very well, especially considering the the slower pace of this expansion.

As a result, wages and salaries are increasing at a strong rate, rising between 2.5% -5% on a Y/Y basis for the entire expansion.

Above is the annual Y/Y percentage change in Minnesota GDP.   It's slowest pace was 2.9% in 2014.

So, the state is at full employment, wages are growing far above the national average, and total growth is very strong.

As usual, Hinderaker has no idea what he's talking about.

Weekly Bond, Equity and International Round-Up

International Week in Review

Bond Market Week in Review

Equity Market Week in Review

Weekly Indicators for January 25 - 29 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

The trend of some poor data becoming "less worse" continues.