Weekly Indicators for December 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

As usual for this time of year, there is lots of seasonal volatility. That being said, the recent surge in positive readings for coincident and short leading indicators came to a halt.  Maybe it's just noixe, we'll see.

Tell Me Again How Oil Extraction Is the Panacea for Employment Growth?

The top chart shows the total number of employees in the oil extraction area.  Yes, it increased from 120,000-200,000 between 2005 and 2015.  That's a whopping 80,000.  But as the bottom chart shows, the total number of oil jobs is still less than 1% of all payroll jobs.  

Let's assume a 4-1 multiplier effect -- for every 1 oil extraction job created, 4 additional jobs are created.  That would only be a total of 320,000 jobs -- about 2-3 months of job gains at the current pace of creation.

There's just not much here from an employment perspective.

November housing permits continue positive news

 - by New Deal democrat

This is one of those days where the St. Louis FRED is slow adding the new data, so no snazzy graphs, BUT ...

This morning's housing data was a positive, even though it generally retreated from last month.

1. Single family permits made another post-recession high.

2. Total permits were over 1200/month for 3 months in a row, the first time that has happened in 9 years.

3. With the exception of the 3 month period including June of 2015, which saw big distortions due to multifamily permits issued in NYC to be included in an incentive program, this was the highest 3 month average for permits in 9 years.

The only negative was that actual housing starts retreated, and the 3 month average was no better than run of the mill for this year.  Since I favor the less volatile permits metric, and discount the NYC distortions, on balance this month was a significant positive.

I expect positive readings to continue for the next several months as last July's post-Brexit lows in interest rates continue to show up in new housing.  The negative whipsaw from the increase in rates since the US presidential election will start later.

More evidence 2017 will feature late cycle inflation

 - by New Deal democrat

Yesterday's Fed rate hike and this morning's CPI both support the idea that 2017 is likely to feature typical late cycle inflation -- being chased by the Fed.

This post is up at XE.com.

A Conservative Commentator's Technical Analysis of the SPYs

2016 Economic Year in Review and 2017 Projection

This is up at XE.com

Five graphs for 2016: final update

 - by New Deal democrat

At the beginning of this year, I identified graphs of 5 aspects of the economy that I particularly wanted to watch.  Now that the year is ending, let's take one final look back.

#5 The Yield Curve

The Fed attempted to embark on a tightening regimen last December.  The question became, would the yield curve compress or, worse, invert, an inversion being a nearly infallible sign of a recession to come in about 12 months.  It turned out that the weakness in the world economy plus Brexit put the Fed on hold (until now) and only caused a moderate compression at the long end -- which has now reversed: 

The bottom line is that the recession fears based on an allegedly compressing yield curve were unfounded.  Alll year long he yield curve remained quite positive when seen in a historical perspective.  Presumably the steepening since the US Presidential election, as traders consider a stimulus that may be inflationary, will sideline the clams of DOOOM from this particular metric.

#4 The trade weighted US$

Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US$ that began in late 2014 -- which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.

Here there was a big change, even with the surg-ette since the election:

Against all currencies, the US$ remained in a range of unchanged to +3% YoY  - a  more  typical if still elevated range.  Against major currencies, the US$ actually was down YoY for most of this year..   This was good news.  It may be changing in 2017.

#3 The inventory to sales ratio

An elevated ratio of business inventories to sales means that businesses are overstocked.  This has frequently but not always been associated with a recession.  I have been using the wholesalers invenotry to sales ratio, since it has fewer secular issues.  This was perhaps the  most bearish graph of all one year ago, as it was in a range that frequently coincided with recessions.  It made a peak early this year, and declined slowly thereafter -- until the October report released last week:

The decline from peak accurately indicated that the "shallow industrial recession" of 2015 was ending.  Even better, decomposing sales (blue in the graph below) vs. inventories (red) shows us that sales have increased smartly while inventories continue to decline - a bullish sign typically seen in the first year after the end of a recession:

#2 Discouraged workers

While 2015 saw a big improvement in involuntary part time employment, this trend completely stalled this year, with the sole exception of last week's report for November:

We are still at least 1,500,000 above a "good" number.  Worse, this kind of stall is something that we see as a cycle is approaching its peak.  This failure to make further progress is a big concern about the labor market going forward.

#1 Underemployment and wages

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, until recently nominal increases  averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power.  

There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers as discussed above.

This expanded "U6" unemployment rate ( minus 10%)  is shown in red in the graph below, together with YoY nominal wage growth (blue) (minus 2%):

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  U6 has been under 10% for close to a year,, and while there has been some mild improvement off the bottom for wage growth, it has never even come close to 3% YoY  

More than anything, the US needs real wage growth for labor, and the present nominal reading of  2.4% still isn't nearly good enough.  With the expansion in deceleration mode well past mid-cycle, it is not clear at all how much further improvement we are going to get before the next recession hits.

To close out 2016, three of the concerns -- the yield curve, the inventory to sales ratio, and the overly strong US$ -- abated at least in part.  The tow concerns I had about workers and their wages, however, both remain elevated, and are not encouraging, particularly if the next recession should happen within the next couple of years.  

Weekly Indicators for December 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.

A negative trifecta is developing (we're not quite there yet) of interest rates, US$ appreciation, and gas prices.

October JOLTS and Labor Market Conditions Index positive but meh

 - by New Deal democrat

The JOLTS Survey and the Labor Market Conditions Index are two metrics with great promise, but like those surveys, but suffer by not having a long enough real-time history to use with full confidence.

In the case of the JOLTS survey, there is now a clear divergeance between the pattern during this expansion and the only full sample of the prior expansion. 

Here's job openings (blue),  hires (red), and quits (green, right scale) since the first bottom in 2003: 

In the one and only complete cycle since the series began, hires and quits peaked first, while openings continued to increase until shortly before the onset of the 2008 recession.  During this cycle, hires have gone sideways for over a year, while openings continued to rise until recently, and now appear to be rolling over.  Meanwhile quits, while down this month, are still at a new high on a 3-month rolling average. 

So, In the last cycle, YoY job openings held up until nearly the end.  This time around, it appears at least for now that openings may be turning before quits.  Unless job openings make new highs in the months ahead, this cycle will not match the last one.  We just don't have enough history with the JOLTS series to know which resolution is more likely.

In the past, employment growth (which is the net of hiring over firing) decelerates markedly before layoffs begin to increase.  JOLTS now breaks that down into hiring and discharges, shown below:

Hiring looks like it shows late cycle deceleration, but this has not translated into any increase in layoffs and discharges.  Here's a close-up of the last year from the graph above

Turning to the Labor Market Conditions Index, the problem is backfitting, since the underlying data goes back half a century, but the index itself was only created a few years ago.  We need to see how it performs in real time.

Earlier this year there were some poor, negative readings leading some Doomers to holler "recession!" but these have largely been revised away:

As you can see, the most recent reading (for October) was also positive.

The recent upturn in housing should translate into increase spending, and thus increased employment, in the next 6-12 months, so I expect further positive readings here over the near term.

Bottom line: for the economic expansion, there is no sign in these two metrics that Indian Summer will give way to the Gales of November anytime soon.

2017 is increasingly looking like a year of inflation

 - by New Deal democrat

As things stand presently, it increasingly like 2017 will be a year where inflation finally exceeds 2%, leading to Fed rate hikes in a classic late-cycle trend.

This post is up at XE.com.

Housing forecast for 2017

 - by New Deal democrat

This post is up at XE.com.  How, and when, can we expect the see-saw that has been interest rates in 2016, to affect the housing market in 2017?

My Columns Are Up At XE.com

International Economic Week in Review

Bond Market Week in Review

Equity Week in Review

Weekly Indicators for November 28 - December 2 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

While the present and near future forecast look sunny, the broad US$ joined interest rates as an important negative this week.

November jobs report: good unemployment news, faltering wage growth

- by New Deal democrat

HEADLINES:

• +178,000 jobs added
• U3 unemployment rate down -0.3% from 4.9% to 4.6%
• U6 underemployment rate down -0.2% from 9.5% to 9.3%

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

Wages and participation rates

• Not in Labor Force, but Want a Job Now: down -36,000 from 5.912 million to 5.876 million  
• Part time for economic reasons: down -220,000 from 5.889 million to 5.669 million
• Employment/population ratio ages 25-54: down -0.1% from 78.2% to 78.1% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.02 from $21.71 to $21.73,  up +2.4% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

September was revised upward by +17,000, but October was revised downward by -19,000, 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 mixed.

• the average manufacturing workweek declined -0.2 from 40.9 to 40.7 hours.  This is one of the 10 components of the LEI, and is a negative.
 
• construction jobs increased by +19,000 YoY construction jobs are up 155,000.  
 
• manufacturing jobs decreased by -4,000, and are down -54,000 YoY

• temporary jobs increased by +14,300, a new high.


• the number of people unemployed for 5 weeks or less increased by +24,000 from 2,397,000 to 2,421,000.  The post-recession low was set 1 year 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.
• Professional and business employment (generally higher- paying jobs) increased by +63,000 and are up +571,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.1  from  106.0 to 106.1 

•  the index of aggregate payrolls was unchanged at 131.3 . 

Other news included:         

• the alternate jobs number contained  in the more volatile household survey increased by  +160,000 jobs.  This represents an increase  of 2,641,000  jobs YoY vs. 2,253,000 in the establishment survey.    
   
• Government jobs rose by +22,000.     

• the overall employment  to  population ratio for all ages 16 and up was unchanged at  59.7%  m/m and is up +0.3% Y oY.   
• The  labor force participation rate fell -0.1% from 62. 8% to 62.7% and is up +0.2% YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY 

This was a good headline report with mixed internals. The good news was mainly in the underemployment and underemployment rates, which both fell to new lows, as did the number of those part time for economic reasons. That temporary employment is making new highs is also a good leading indicator for the rest of the jobs market.

The bad news primarily came in faltering wage growth, which fell to +2.4% YoY, and aggregate real wages, which also fell.

Again, a good late cycle "Indian Summer" employment report, but one that if anything amplifies my concern that in the next recession we will see actual wage deflation for the first time in 80 years.

  

The Potential For Very Bad Inadvertent Policy Impacts of Trump's Trade Policies

     This week, president-elect Trump directly intervened in the private economy.  He negotiated directly with the Carrier Corporation, getting them to agree to keep an Indiana factory in the U.S..  He has also said that renegotiating NAFTA is a top priority, along with increasing export and import tariffs to prevent U.S. companies from moving abroad.

     Above is a chart showing that real exports as a percent of GDP are now greater than 12% of real U.S. GDP.  While we don't know the exact parameters of Trump's policies, we do know that the law of unintended consequences tells us that for every policy action, there may be a large number of inadvertent policy results.  Trump's policies have the potential to seriously unbalance 12% of the U.S. economy, which may negatively ripple through other economic sectors.  

Is A Housing Slowdown in the Cards?

The chart above plots three sets of data: the 10 year CMT treasury (in blue), the 15-year mortgage rate (in red) and new home sales (in green).

Note that as the blue and red line declined from the beginning of 2014 new home sales rose.  This is an easily explained relationship: lower interest rates lead to lower financing costs, increasing overall housing demand.  But interest rates have sharply increased since the election.  Just as low rates stimulate demand, expect higher rates to lower it.

    

Bonddad's Thursday Linkfest

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 

Fed Releases the Beige Book

Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from early October through mid-November. Activity in the Boston, Minneapolis, and San Francisco Districts grew at a moderate pace, while Atlanta, Chicago, St. Louis, and Dallas cited modest growth. Philadelphia, Cleveland, and Kansas City cited a slight pace of growth. Richmond characterized economic activity as mixed, and New York said activity has remained flat since the last report. Outlooks were mainly positive, with six Districts expecting moderate growth.

Demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few Districts. Modest to moderate increases in capital investment are expected in several other Districts. Business service firms saw rising activity, especially for high-tech and information technology services. Reports from ground freight carriers were mixed, while port cargo increased. A majority of Districts reported higher retail sales, especially for apparel and furniture. New motor vehicle sales declined in most Districts, with a few Districts noting a shift in demand toward used vehicles. Tourism was mostly positive relative to year-ago levels. Residential real estate activity improved across most Districts. Single-family construction starts were higher in a majority of Districts, while multifamily construction reports were mixed. Activity in nonresidential real estate expanded in many Districts. Banking conditions were largely stable, with some improvement seen in loan demand. Farmers across reporting Districts were generally satisfied with this year's harvests. However, low commodity prices continue to weigh on farm income. Investment in oil and gas drilling increased slightly, while reports on coal production were mixed. A tightening in labor market conditions was reported by seven Districts, with modest employment growth on balance. Districts noted slight upward pressure on overall prices.

Personal Income and Spending Increases

Personal income increased $98.6 billion (0.6 percent) in October according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $86.5 billion (0.6 percent) and personal consumption expenditures (PCE) increased $38.1 billion (0.3 percent).

Real DPI increased 0.4 percent in October and Real PCE increased 0.1 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.

The corporate profit recession has ended ... (but) ...

 - by New Deal democrat

The important long leading indicator of corporate profits was reported yesterday for the 3rd Quarter.

The good news is, corporate profits increased significantly, whether measured nominally or adjusted by unit labor costs (the adjustment preferred by Prof. Geoffrey Moore who identified corporate profits as a long leading indicator:

The bad news is also evident from the graph.  Regardless of which way you measure, corporate profits are still below their peak from several years ago.  In particular, adjusted by unit labor costs, corporate profits are still 9% less than they were at their peak in 2012.

So, the profits recession has bottomed -- as of Q4 of last year.  But before you get too excited about the end of the profits recession, consider that industrial production isn't exactly setting the world on fire:

And because profits are below their peak for this expansion, they are one indicator which has still given the necessary signal to be consistent with an oncoming recession.

Bonddad's Wednesday Linkfest

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 


Brad Delong With a Really Important Insight

While standard measures show productivity growth falling, all other indicators suggest that true productivity growth is leaping ahead, owing to synergies between market goods and services and emerging information and communication technologies. But when countries with low-growth economies do not sufficiently educate their populations, nearly everyone below the top income quintile misses out on the gains from measured economic growth, while still benefiting from new technologies that can improve their lives and wellbeing.

Exports Jumped Thanks to a Large Increase in Consumer Durable Good Exports

Corporate Profits -- One of the Primary Leading Indicators -- Increased for A Second Consecutive Quarter

Consumers Continue to Buy a Lot of Durable Goods; They Bought a Lot of Cars Last Quarter

The US is A Service Economy and Has Been for A Very Long Time

President-elect Trump has promised he'll bring back high-paying manufacturing jobs.  Unfortunately, macroeconomic forces disagree with him.

The above chart places total service sector and goods-producing jobs on a logarithmic scale.  You'll notice that total manufacturing jobs plateaued in the late 1970s.  Meanwhile, total service jobs have consistently increased since the beginning of the 1960s.

The above chart plots total monthly increases of service sector (red) and goods producing (blue) jobs. For the last four expansions, the service sector has consistently created far more jobs than the goods producing sector.

The US is a service economy.  Period.