Weekly Indicators for March 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This week most of the data that has been decelerating turned in a more positive performance.

Liveblogging housing, industrial production, and JOLTS

 - by New Deal democrat

This is one of those days when it seems every piece of economic data in the whole world is getting reported simultaneously.

So as the data gets reported, I'll give you three quick takes.

Housing permits and starts for February

While this was a decline from January, so far housing is holding up very well in the face of higher interest rates.

Single family housing permits -- the least volatile of all the numbers -- declined m/m but December remains the expansion high. The series remains very positive.

Overall housing permits -- less volatile than starts -- declined to their lowest level since September, but January remains the expansion high, so this trend remains positive as well.

Housing starts declined m/m from January's expansion high. To take out most of the volatility, I look at the three month moving average. This is the second highest during the entire expansion after last month. So these remain very positive as well.

Finally, there is a category of housing which has been authorizaed but not yet started. January remains the expansion high, and February is second, equal to December.  This tells us there is a lot of construction in the pipeline.

Bottom line: m/m negative, but longer term trend still (somewhat surprisingly) still very positive.

Industrial production

This was also a very positive report.

The overall number was up 1.1%.
Manufacturing was us 1.3%
Mining -- the big reason for last month's decline -- was up nearly 5%.

The DOOOMERS' meme that hard numbers haven't replicated the Fed and ISM surveys refuses to die.  And yet YoY overall production is up nearly 5%, and manufacturing up nearly 3%. That seems pretty good to me.

JOLTS

This data is from January. Like housing, it was generally down m/m, but very positive.  I don't bother anymore with openings, which I consider not just soft, but easily gamed data. As to the hard data:

Hires -- the second highest, but for last October, in the expansion.

Quits -- the second highest of the expansion, except for December's.

Total separations -- the highest of the expansion (which is a positive, since these also start to decline prior to a recession).

Layoffs and discharges -- increased sharply to levels seen in last summer. This is the one negative, since these bottomed in midcycle during the last expansion.

All in all, the three economic reports today painted a picture of continuing positive trends.

February update: real wages and real spending

 - by New Deal democrat

Now that we have February inflation, let's take an updated look at real wages and real spending.

First of all, real average hourly wages increased slightly in February, but are still -0.6% under their July peak:

But, because the total hours worked surged so much in February, real aggregate wage earnings, which had stalled since July, rose to a new record:

If it's not revised away, this means that the middle and working classes have more income to spend, without dipping more into savings.

Turning to retail spending, real retail sales declined for the third month in a row:

But note that the big surge in sales from November has been untouched, and means that real retail sales remain higher than at any point before then.

This is true even if we adjust for population:

Since population-adjusted real retail sales have been a long leading indicator for the economy, I'm not terribly concerned about the recent small decline at this point.

Real M1 and M2 growth the lowest since 2010

 - by New Deal democrat

In view of yesterday's inflation report, I take a look at the recent big deceleration in both real M1 and M2 over at XE.com.

Labor force participation, unemployment, and wages: an update

 - by New Deal democrat

About a year ago I wrote a series of posts on the relationship between the unemployment rate, labor force participation, and wage growth. Especially in view of last Friday's jobs report, which showed blockbuster hiring, but a continuation of tepid wage growth over 8 years into the expansion, now is a good time for an update.

To recapitulate, history shows that wage growth is lags the economy, and specifically only turns after the unemployment rate begins to decline. More specifically, since 1994, once the underemployment rate has fallen below about 9% (red, inverted in the graphs below), wage growth (blue) has begun to improve:

Meanwhile, the YoY% change in the prime age labor force participation rate turns about one year before wages (green):

On the other hand, the absolute *level* of prime age labor force participation only bottoms *after* wages have turned:

Here is the monthly graph through last Friday, whowing that all three metrics have continued to improve:

In historical context, last year I suggested that the traditional Phillips curve, which posited a relationship between lower unemployment and higher wage growth and inflation, is best seen as a special variant of a broader relationship between the labor force participation rate (i.e., the total of those both employed and unemployed). On a secular basis, the correlation has been that the YoY change in  labor force participation (blue in the graphs below) appears to lead improvement in wage growth (red) by about one year.  Here's the high-inflation, high labor bargaining power 1960s and 1970s: 

and there is the low inflation, low bargaining power era since 1988:

In both of these eras, generally participation led wage growth by about one year.

Last year I  also suggested that a more nuanced cyclical feedback mechanism appeared to be that too rapid an increase in participation will lead either to higher inflation (the 1960s and 1970s) or lower short term wage growth (the 1980s to present. I showed that via a variation on the misery index that double-weighted inflation, in which the only major departures were the Oil shocks of 1974, 1979, 1990, and 2008:

Here is an updated graph of wage growth (blue) and prime age labor force participation (green, right scale) through Friday:

In accord with my hypothesis last year, the continuing surge of participants into the labor force has acted to depress wage growth.

So, in sum, the trends remain positive, but an acceleration of wage growth probably won't happen until this surge subsides.

The Grand Illusion 2.0

 - by New Deal democrat

Introductory note: this is a very long epistle. But I think my point needs to be made fully and at length. Before you go further, in fairness here is the TL:DR version:

• Advocates of free trade and globalization were taken aback a week ago by the assumption by China's President Xi Jinping of rule for life.
• This was because it runs completely contrary to their theory that free trade leads to economic liberalization, which in turn leads to political liberalization.
• This theory has been repeatedly and thoroughly repudiated throughout history, most catastrophically be World War I.
• That's because autocrats will use the gains of economic trade for their own ends, typically the pursuit of further political and military power.
• Historically middle classes do not revolt against autocracy when they are prospering, but rather only after a period of rising expectations has been dashed by an economic downturn in which the autocratic elite unfairly forces all of the burden onto them.
• But since these historical facts are nowhere to be found in the economic models, they are ignored as if they do not exist. We can only hope they do not once again lead to catastrophe.

First, let me pose a thought experiment.  Country A and Country B propose to enter into Agreement X. We have no idea at all what Agreement X is, but we know that the result will be that both Country A and Country B will each be richer by $1 Trillion each and every year thereafter.

Country A, being an egalitarian paradise, is going to share out the proceeds equally among its population of 250 million, with each person getting $4,000 per year.

The dictator of Country B is going to do the same with 1/2 of its $1 Trillion gain, making his population very happy, but -- because this is his personal aim -- he is going to spend the other $500 Billion each and every year in building up its military so that it can challenge and eventually vanquish Country A, and then keep all of the gains of Agreement X to itself.  

Should Country A enter into Agreement X? 

  

------------------

A week ago The Economist opined that "The West's Bet on China has Failed," stating that:

Last week China stepped from autonomy into dictatorship. That was when Xi Jinping ... let it be known that he will change China's constitution so that he can rule as president for as long as he chooses .... This is not just a big change for China but also strong evidence that the West's 25 year long bet on China has failed. 

After the collapse of the Soviet Union, the West welcomed [China] into the global economic order. Western leaders believed that by giving China a stake in institutions such as the World Trade Organization would bind it into the rules based system ... They hoped that economic integration would encourage China to evolve into a market economy and that, as its people grew wealthier, its people would come to yearn for democratic reforms ....

CNN's Fareed Zakaria recoiled in horror, writing in the Washington Post that

[W]hat’s happening in China ... is huge and consequential. China is making the most significant change to its political system in 35 years. 

For decades, China seemed to be getting more institutionalized.... But that trend has now been turned on its head. If term limits are abolished, which is now almost certain, Xi Jinping could stay China’s president, general secretary of the Communist Party and chairman of the Central Military Commission for the rest of his life. And he is just 64.

.... The real danger is that China is eliminating perhaps the central restraint in a system that provides staggering amounts of power to the country’s leaders. What will that do, over time, to the ambitions and appetites of leaders? “Power tends to corrupt,” Lord Acton famously wrote in 1887, “and absolute power corrupts absolutely.” Perhaps China will avoid this tendency, but it has been widespread throughout history.

If Zakaria felt blindsided, he should not have been. Because ten years ago, after he published "The Post-American World," arguing that because the US had successfully spread the ideals of liberal democracy across the world, other countries were competing for economic, industrial, and  cultural -- but not military -- power, I confronted him at the former TPM Cafe. 

For the truth is, the West's bet on China, so ruefully mourned by The Economist and Zakaria, was always likely to fail. That free trade leads to economic and political liberalism and to peace ---- championed by neoliberal economists and their political retinue -- has been a fantasy for over 100 years, and for 100 years it has been a lie. They would have known if their theories and equations could account for the likes of Kaiser Wilhelm II. But since their equations and theories are blind to the pursuit of power, they dismiss it -- at horrible cost to the world.

In an interview with David Frum, Minxin Pei, who a decade ago dissented, predicting that China would not transition towards true economic and political freedom, said it well:

[M]any people were too dazzled by the superficial changes, especially economic changes, to realize that the Communist Party’s objective is to stay in power, not to reform itself out of existence. Economic reform or, to be more exact, adopting some capitalist practices and embracing market in some areas, is only a means to a political end....  

[W]hen China was forced to keep the door [to liberalization] more open, it was in a weaker position relative to the forces outside—the West in general and the U.S. in particular. But when the conservative forces inside China gain strength while the West appears to be in decline, those forces are far more likely and able to close the door again, as is happening right now. So, while the logic of irresistible liberalization appears to be reasonable on the surface, it overlooks the underlying reality of power. 

I set set forth the fuller historical context a decade ago in my response to Zakaria, which I am taking the liberty of reposting in full immediately below. 

 

-----

Over at TPM Cafe, this week Fareed Zakaria's new book, "The Post American World" is being discussed. In it, Zakaria repeats the theory of globalization's most toxic and unproven claim: that countries which participate in trade together do not make war upon one another. So if you want to prevent war, just participate in deep and interwoven trade with the other country and everything will be hunky-dory.

It's a lie.

Zakaria claims that We're Living in Scarily Peaceful Times":

The new and most dangerous twist to all this is that our great looming danger is Russia, China, and the rising oil dictatorships.... This is a worldview bereft of any historical perspective. Compared with any previous era, there is more economic integration and even comity among the world's major powers. The imbalance between the West and the rest is large, not complete but large and in most areas increasing. The newly emerging states want to grow within the existing world order, which John Ikenberry has nicely described as "easy to join and hard to overturn." The world is going our way, slowly and fitfully, with some detours. No great power has an alternative model of modern life that has any real attraction?

This is essentially the same argument that Thomas Friedman made in The Lexus and the Olive Tree' and reiterated even a short time ago in this liveblog:

You know in Lexus I wrote that no two countries would fight a war so long as they both had McDonald's. And I was really trying to give an example of how when a country gets a middle class big enough to sustain a McDonald's network, they generally want to focus on economic development. That is a sort of tipping point, rather than fighting wars.

This argument, repeated over and over on both necoconservative and neoliberal sites, and all over the corporate media, that free trade leads to middle classes leads to democracy leads to kumbayah, is pretty simple, and it is dangerously wrong. Or as Zakaria reviewer David Rieff summarizes:

he reads too much into into two indisputable facts of the current moment --- that there are fewer major wars taking place than in living memory and that there is a greater level of global economic integration than at any time in history.

The truth is, the free trade zealots also have spent too much of their careers seduced by neoclassical economics' favorite mythical beast, Homo economicus, the Rational Man; and not enough time reading history.

For a start, contrary to the free trade zealots, this is not the first period in world history in which there has been relatively "free" trade, nor is it the first time in which there has been "globalization." For example, as is pointed out in an article entitled European Social Security and Global Politics By Danny Pieters, European Institute for Social Security Conference

Globalisation is not a new phenomena. During the second part of the nineteenth century there was a strong move toward the liberalisation of international transactioins, and international trade expanded rapidly until the beginning of World War I

And just which country in Europe was undergoing the most rapid growth and industrialization during the perioed from 1870-1914? As this essay states, Germany

embarked upon an extensive education program; it specialised in technical ares and so there was a greater push in that direction. It produced more and better scientists, and so Germany began her industrial advance. Also, the French threat, even if it was superficial, spurred the Germans in authority into action, and made them make Germany stronger and superior.

German expansion was also helped by the expansion of the railway network, so that goods and mail could get from one place to another, and to more places, faster and more efficiently.

Needless to say,much like the mercantilist expanding autocracies now fawned over by so many of the free trade zealots, during this time Germany was a monarchy, ruled by the Kaiser.

Even worse, this isn't just the first time that economies have experience "globalization", it also isn't the first time that this exact same argument has been made. In his 1910 best-seller, "The Great Illusion" Norman Angell wrote that:

the universal assumption that a nation, in order to find outlets for expanding population and increasing industry, or simply to ensure the best conditions possible for its people, is necessarily pushed to territorial expansion and the exercise of political force against others.... It is assumed that a nation's relative prosperity is broadly determined by its political power; that nations being competing units, advantage in the last resort goes to the possessor of preponderant military force, the weaker goes to the wall, as in the other forms of the struggle for life. 

The author challenges this whole doctrine. He attempts to show that it belongs to a stage of development out of which we have passed that the commerce and industry of a people no longer depend upon the expansion of its political frontiers; that a nation's political and economic frontiers do not now necessarily coincide; that military power is socially and economically futile, and can have no relation to the prosperity of the people exercising it; that it is impossible for one nation to seize by force the wealth or trade of another -- to enrich itself by subjugating, or imposing its will by force on another; that in short, war, even when victorious, can no longer achieve those aims for which people strive.... 

There is quite simply no difference at all between the theses of Angell a century ago, and Friedman and Zakaria now.

And what happened only 4 years after "The Great Illusion" was published? Well, another book that Zakaria and Friedman ought to read is Vera Brittain's autobiography, "Testament of Youth". Vera Brittain was a comfortable affuent middle class girl who was accepted to Oxford University shortly before World War I broke out. By the time it was over, her brother, Edward; her fiance Roland Leighton; and every other young man she had been close to, had been killed. Brittain's book is a searing documentary about the utter destruction of an entire generation of British young men caused by the war.

Just how many people were killed by World War I?  One source puts just the number of military deaths at 10 million. Including the wounded, in some European countries over half of the entire generation of young men were casualties.  Another sourcesays:

the percentage of a country's population directly afflicted. During the course of World War One, eleven percent (11%) of France's entire population were killed or wounded! Eight percent (8%) of Great Britain's population were killed or wounded, and nine percent (9%) of Germany's pre-war population were killed or wounded! The United States, which did not enter the land war in strength until 1918, suffered one-third of one percent (0.37%) of its population killed or wounded.

Simply put, World War I is a thorough and devastating refutation of the argument that free trade leads to peace and democracy, Quite the contrary, had Zakaria and Friedman bothered to actually study history, they might have found out that revolutions typically do not occur in eras of increasing plenty. Rather, they occur in times where rising expectations have been dashed:

the "J-curve" theory says that when conditions improve for a relatively long period of time, — and this is followed by a short economic reversal — an intolerable gap occurs between the changes that the people expect (dashed line) and what they actually get (solid line). Davies predicts that this is when revolution will occur (arrow).

Support for this theory was found in a 1972 study of 84 nations. Researchers found a clear relationship between indications of political instability and economic frustration. "Frustrated countries" are those that had poor economic conditions — low economic growth, insufficient food, few telephones and physicians — while being acquainted with the higher living standards of industrialized, urbanized countries.

These studies show that frustration is more likely to develop from relative frustration — the gap between their expectations and the reality that does not live up to these expectations. People in poor countries isolated from the outside world do not realize how poor or frustrated they are. Their frustrations are accepted merely as part of living. In contrast, the people in poorer countries exposed to modern standards feel more "frustrated." To top this off, deprived people who have experienced some recent progress are more frustrated than those who experienced poverty and oppression.

In short, just as Germans were hardly big agitators for democracy during the time the German state was expanding, and autocracy was resulting in greater prosperity, so we should not expect that any autocratic states today that are profiting mightily from economic growth are suddenly going to turn democratic. To the contrary, just like the Kaiser's Germany, it is much easier to direct aggression elsewhere.

Democratic revolutions occur when previously rising expectations have been dashed, and the populace has no outlet for their anger and frustration. In democracies, governments can be changed (as in 1932); but in autocracies, the ruler's cronies are protected from the privations, and with no alternative avenue of recourse, and seeing the manifest injustice of the benefits of the system, the populace revolts.

For example, Taiwan's democratic reforms were sparked by the violence of the "Kaohsiung Incident" of 1979. Similarly, democracy finally came to South Korea in 1987 when workers finally rebelled against artificially low wages:

South Korea is hardly a model of a free economy. The hand of government planners in setting priorities and steering companies has been heavy. The low wages that helped fuel growth did not result from market forces. For 25 years, successive governments deliberately held down pay rates. They virtually barred strikes, jailed militant labor leaders, and decreed tough guidelines for wage increases. To block development of independent unions, companies created their own and installed leaders acceptable to the government. Says a Western diplomat in Seoul: ''Union leaders were practically appointed by the national security police.'' With democratic winds sweeping South Korea this summer, workers were emboldened to push for higher pay, independent unions, and the right to strike, 

[2018 update: Even the American Revolution had elements of this paradigm, as England reined in the colonist's rising fortunes following the French and Indian War by taxing them for the costs, expanding the territory of Quebec to include all of what is now the American northern Midwest, and prohibiting expansion beyond the Appalachians.]

It is a disgrace that we see these same discredited theses, this same Great Illusion, embraced by corporate media pundits so often. That free trade inevitably leads to peace and democracy is a Big and Dangerous Lie, to which World War 1 is the most spectacular and unequivocal counter-evidence.

There is no guarantee, alas, that we are not now on that same catastrophic path.

--------

In 2015, I reiterated this point more succinctly:  

A more fundamental point is about human nature.  In any economic downturn, the powerful elites are going to try to deflect all of the suffering on the powerless masses.  In a representative democracy, eventually the majority will rebel at the ballot box and elect a party which promises to end their suffering.  [Update: It might be a left-wing party, like Syriza in Greece or FDR's New Deal democrats in the US, or it might be from the right-wing like AfD in Germany or Donald Trump.  ]

In an authoritarian state, however, no such safety valve exists.  That's why revolutions don't happen in an era of rising expectations.  They happen when rising expectations are dashed.  So long as China's economy continues to expand stoutly, expect no meaningful turbulence.  But someday China will have a recession, and then, dear reader, is when world history will get interesting.

So here we are a decade later, and the free-trade economists and their acolytes are gobsmacked by something that was not just predictable, but actually predicted,  because there is no place in their theories for actual human behavior as revealed in history. We can only hope that when the inevitable happens, China will not lash out as Kaiser Wilhelm did a century ago.

Weekly Indicators for March 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

As anticipated, the rough patch in the coincident indicators has resolved to the postive, but there has been a little more deterioration among the long leading indicators.

February jobs report: a blowout! Except (sigh) for wages

- by New Deal democrat

HEADLINES:

• +313,000 jobs added
• U3 unemployment rate unchanged at 4.1%
• U6 underemployment rate unchanged at 8.2%

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

Wages and participation rates

• Not in Labor Force, but Want a Job Now: declined -40,000 from 5.171 million to 5.131 million   
• Part time for economic reasons: rose 171,000 from 4.989 million to 5.160 million
• Employment/population ratio ages 25-54: rose 0.3% from 79.0% to 79.3%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.06 from  $22.34 to $22.40, up +2.5% 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.)      

Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  

• Manufacturing jobs rose by 31,000 for an average of 18,700/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 300 for an average of -17/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 15,000. January was also revised upward by 39,000, for a net change of +54,000.   

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

• the average manufacturing workweek rose 0.2 hours from 40.8 hours to 41.0 hours (reversing last month's decline).  This is one of the 10 components of the LEI.
 
• construction jobs increased by 61,000. YoY construction jobs are up +254,000.  

• temporary jobs increased by 26,500. 
 
• the number of people unemployed for 5 weeks or less increased by 228,000 from 2,280,000 to 2,508,000.  The post-recession low was set over two years ago at 2,095,000.

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

• Overtime rose from 3.5 to 3.6 hours.
• Professional and business employment (generally higher- paying jobs) increased by  50,000 and  is up +495,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.9%.

•  the index of aggregate payrolls rose by 0.6% .     

Other news included:            

• the  alternate jobs number contained  in the more volatile household survey increased by  785,000  jobs.  This represents an increase of 1,924,000 jobs YoY vs. 2,281,000 in the establishment survey.      
     
• Government jobs rose by 28,000.       

• the overall employment to population ratio for all ages 16 and up rose 0.3% to 60.4  m/m  and is up 0.4% YoY.          
• The  labor force participation  rate rose 0.3% to 63.0  m/m and is up 0.1% YoY  

 SUMMARY   

This was a a blowout positive report as to nearly all metrics. All important categories of employment rose strongly, as well as aggregate hours and aggregate payrolls, the employment to population ratio and the labor force participation rate. Among prime age workers, the e/p ratio is now only -0.9% under its 2006 high, although it is still about 2% under its all time high from 1999. 

Even the "soft" data of the unemployment and underemployment rates is largely explained by the surge in labor force participation -- i.e., more people entering the jobs market to find work.

Negatives remain the persistently high number of people who are not even in the labor force but say they want a job now, and the increase in involuntary part-time employment.

Wage growth for ordinary workers remains little better than flaccid, up 2.5% YoY this month. Last month's much ballyhooed 2.9% YoY increase for all workers fell back to a 2.6% rate. In the past, a surge in labor force participation has meant a short-term deceleration in wage growth .

So in sum this was an excellent report. But it does nothing to assuage my longer term concern about what will happen to wages in the next recession.

One third of the way to the 2020 Presidential election

 - by New Deal democrat

Today marks 16 months since the 2016 election, and 32 months before the one in 2020.  

We are one third of the way through.  Barring a major industrial or nuclear war, we are going to make it.

The only major legislative accomplishment so far is the pro-cyclical, lopsided tax cut giveaway to corporations and the wealthy.  Additionally a bunch of lifetime judicial appointments have been made. 

On the executive side, there have been a slew of directives, and a bunch of regulatory backsliding, chiefly at the EPA, and net neutrality.

In 2021, the executive directives can be quickly undone.  New federal court judgeships at the lower levels can be established equal in number to those appointed by the current executive. Anthony Kennedy. bless his soul, looks like he is not retiring. The tax cuts can be reversed using the same reconciliation process as was used to establish them (and the booty clawed back). New regulators can restore what was lost.

And the blue tsunami of voters born since 1974 will building higher and higher as the red wave recedes one funeral at a time.

Deep breaths. We  will get there.

Interest rates and jobs: a variation on the model

 - by New Deal democrat

Friday is nonfarm payrolls day, so in the absence of more noteworthy economic news, let me follow up on Monday's post in which I discussed "A simple model of interest rates and the jobs market."

In it, I suggested that:

1. a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

2. the YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.

One shortfall of that model is that there are two "false negatives" in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.

I suspect that in a low interest rate environment, more modest increases in interest rates might have a more pronounced effect. For example, an increase in mortgage rates from 2% to 4% doubles the monthly interest payments on a mortgage (i.e., a 100% increase), whereas an increase from 8% to 10% only increase it by 25%. 

While I haven't explicitly looked at mortgage rates as of yet, what I did do is plot the simple rise in interest rates from their low points near the beginning of each expansion since the mid-1950s, and see if, during a period of Fed tightening, they always rose to exceed the YoY% change in job growth *before* the onset of all of the recessions since.  Here's what I got:

So the simplest answer is, yes they did. To be more precise, here is the number of months by which this metric led the onset of the last 8 recessions:

1957: 8 months

1960: 1 month

1970: 6 months (while payrolls decelerating) *(false positive for deep slowdown of 1966)

1973: 6 months

1980: 15 months

1982: 12 months* (interest rates never declined below YoY jobs growth)

1990: 17 months *(false positive for 1984 slowdown)

2001: 5 months *(false positive during 1994) 

2008: 34 months

Note that there are 3 significant false positives that occur when there have been two interest rate cycles during an expansion. I only get resonable numbers by re-setting the low in interest rates during those cycles. And since the YoY change in payrolls is a good mid-cycle indicator, by insisting that the intersection occur while YoY payroll growth is declining, I'm already conceding that it must occur later in an expansion.

Finally, there is still the problem of 1933-55, during which time interest rates barely budged.

So unfortunately it seems that this metric is of limited value. It does have some merit as a "yellow light," strongly cautioning that there is a heightened probability of a recession is within 18 months, with the "red light" suggesting the near certainty of a recession within 12 months only if/when the YoY increase in interest rates exceeds the (decelerating) YoY% growth in jobs. It also does seem to suggest something about the depth of the subsequent recessions, as the two "worst" values generated by the metric occur in advance of the 1982 and 2007 deep recessions.

So, where are we now?  Here:

By this metric, we are on the verge of activating the "yellow light." 

The significance of the 1948 recession

 - by New Deal democrat

The yield curve never inverted between the early 1930s and the mid 1950s. And yet there were four recessions during that time.

For that reason I am very leery of over-reliance on that metric as a necessary component of recession forecasting.

In particular, the biggest inflation that occurred ever since 1920 happened in 1947-48 -- an even bigger event than in the 1970s. The Fed pretty much sat on its hands. And yet there was a recession.

What would a case study of the 1948 recession show?  I take a look over at XE.com.

A simple model of interest rates and the jobs market

 - by New Deal democrat

Since we are still in an era of very low interest rates, and during the past such era of 1930-1955 several recessions including the very bad 1938 recession occurred without a yield curve inversion, I have been looking at alternative measures.

One such measure I described about a  month ago, which is simply that an increase in the Fed funds rate of at least 1.75%, but typically 2% or more, and particularly when that occurs within a single year, has usually been correlated with a subsequent recession.

Today I want to propose another model: a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

So, to the graphs!  The first shows the relationship I describe in the above paragraph over the last 60+ years:

To give an even better view, the below graph subtracts the YoY change in the Fed funds rate from YoY payroll growth, and subtracts a further -0.5%, showing that even when the relationship gets that close, with the exception of 2002-03 (a near recession), a recession has always followed:

In other words, there is only one false positive with two false negatives in the 1950s.

Here is a close-up of what that relationship has looked like in the last several years:

Currently the spread is about +0.7%. Note that if the rate of YoY payrolls growth continues to decelerate at its pace from the last several years, and we get the three expected Fed funds hikes this year, we will probably cross the +0.5% threshold by year's end. 

We can coax even more from the model, because the YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out, as shown in the below graph (note that the Fed funds rate is inverted, so that a rise in that rate forecasts a deceleration in YoY jobs growth):

Now  here is a close-up of the last three years:

With rates at the "zero lower bound," the relationship did break down in that there was increasing YoY jobs growth while the Fed funds rate remained at zero, and jobs growth slowed down even as the Fed started to raise rates slowly. But if the longer term correlation holds, then the Fed rate hikes from last year should mean that jobs growth this year and into next year should decelerate at a faster rate than they have in 2015-17.  In other words, we could be under the +0.5% level in our model by midyear.

A thought for Sunday: the march of demographics and the 2018 midterms

 - by New Deal democrat

Below is a graph showing that the older the demographic (up until age 80), the bigger the turnout during midterm elections.

The data behind this graph isn't just from 2014, but from a series of midterm elections over time -- in other words, it has been durable over time.

My purpose in this post is show that, even if these percentages hold in this year's midterms, the electorate is going to skew considerably less "red" than it did in either 2010 or 2014.

To start with, here is the widely reprinted graph from a recent Pew study, showing that, generally, the younger the demographic, the more liberal on social issues and the more Democratic the leaning:

Unfortunately, while dividing age cohorts into only four may make for a clean graph, it paints with far too broad a brush, and has led to some misguided generational bashing online. So let's take a more granular look.

There is lots of evidence that most people form their bedrock political outlook in their late teens. Basically, if at age 18 or so, there is peace and prosperity, you are likely to embrace the ideology of the party of the President. Conversely, if the economy is performing poorly or there is social upheaval, you are likely to embrace the ideology of the opposition.

Importantly, when we slice age cohorts more finely, we find two things:

1. political leanings are durable over lifetimes, i.e., people don't inevitably become more conservative as they age.

2. the outsized conservatism of the age 60-80 cohort most likely to vote in midterms is a happenstance of the last decade or so, and will have faded significantly by election day this year.

The below graph dating from 2012, which breaks down voting cohorts by the Presidency during which they turned 18 years of age for the election from 1994 through 2010:

Quick, which is the most liberal demographic?  Obviously, it's the Greatest Generation, isn't it?
They remained durably Democratic until they passed away (even now there are still about 2 million alive).

So much for turning more conservative with age!

Next, comparing the first four elections with the four most recent elections (3 vs. 3 in the case of the Clinton cohort), only 4 demographic groups become more conservative over time: Truman, Eisenhower, Kennedy/Johnson, and Reagan/Bush. Three -- Nixon, Ford/Carter, and Clinton -- have voted more Democratic over time.

The generational pattern continued in the Presidential election of 2012. The Greatest generation was gone, and the mid-Boomer Nixon cohort stands out as a Democratic leaning demographic:

Although not in the same format, here is an even more granular look at the 2014 vote:

The twhree graphs together show that, confounding received wisdom, over time it has been the Gen X and late Boomer cohorts who came of age from 1975-92 who are the most reliably conservative groups, whereas the mid-Boomer cohort that came of age during the Nixon years has been reliably liberal. [UPDATE: Early Gen Xers may be the exception to the rule, as in 2014 and 2016, they trended blue vs. their earlier solid red record. Possibly the GOP's embrace of rabid retrograde social reaction has been too much for them. The remaining cohorts all continued to vote in 2014 and 2016 in accord with their earlier records.]

With no other information at all, the fact that the deep blue Greatest generation passed from the scene after 2006, and were replaced with more conservative cohorts in the age 60-80 group that votes most heavily in midterms, suggested that those two elections would skew more deeply "red" than any other recent elections.

This year all the Truman cohort and the first 1/4 of the Eisenhower cohort are over age 80, when presumably frail health causing voting participation in midterms to decline precipitously, and have been replaced in the most heavily voting bloc by the "blue" Nixon cohort. Meanwhile the blue Clinton cohort is moving past age 40 and can be expected to vote in greater numbers, at a rate roughly equal to that of the Truman and Eisenhower cohorts.

That alone should shift the demographics of this year's midterm electorate more bluish.

But wait, there's more! Finally, let's take into account the Grim Reaper.  Here's the Census Bureau's year by year look at population cohorts dating from 2016 (h/t Calculated Risk):

There is a very consistent die-off in each birth-year's population of about 100,000 per year beginning in their late 50s.

That means that in the last four years, roughly 3.2 million of the "red" 8 million Truman cohort and another 3.2 million of the "red" 12 million Eisenhower cohort who were alive in 2014 have passed away.

Put this all together and the basic fact is that the 2018 voting population is going to be considerably more liberal and Democratic than the 2014 population, even if Millennials turn out only in percentages consistent with younger voters in other midterm elections.

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One postscript: in researching the above, I also came across the below graph of partisan affiliation by demographic groups as of 2014:

Take a look at what happened with Millennials, because it is unlike what happened with any other age group. After surging towards the Democratic party in 2008, they deserted the party in droves over the next 6 years, turning into independents instead.

The sour implication is very clear: Obama broke their hearts. After promising "Hope and Change," aside from healthcare (not their core issue!) he mainly delivered a nip and tuck around the edges of the neoliberal consensus.

In order for Millennials to turn their ideological choices into reality, they are going to have to take a few centrist Democratic scalps.

Weekly Indicators for February 26 - March 2 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Real M2 has already turned into a negative. Now M1 is also declerating sharply.

Is the secular economic season beginning to change (Part 2)

 - by New Deal democrat

The selloff of a month ago may well be the harbinger of a fundamental change in the relationship between bond yields and stock prices, one that is likely to persist for the next 10 years or so, as  part of a very long term interest rate cycle that has tended to last about 60 years.

This post is up at XE.com.