Saturday, August 3, 2019

Weekly Indicators for July 29 - August 2 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

That corporate bond yields fell to new expansion lows yesterday is a BFD.

As usual, clicking over and reading helps reward me for the effort I put in, as well as giving you up to the moment information.

Friday, August 2, 2019

July jobs report: good headline masks signs of serious producer-led slowdown


 - by New Deal democrat

HEADLINES
  • +164,000 jobs added
  • U3 unemployment rate unchanged at 3.7%
  • U6 underemployment rate declined -0.2% from 7.2% to 7.0% (NEW EXPANSION LOW)
Leading employment indicators of a slowdown or recession

I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were very mixed this month.
  • the average manufacturing workweek fell -0.3 from 40.7 hours to 40.4 hours. This is one of the 10 components of the LEI, and will have a big negative impact. THIS IS A SERIOUS DECLINE.
  • Manufacturing jobs rose by 16,000. YoY manufacturing is up 157,000, a deceleration from last summer’s pace.
  • construction jobs rose by 4,000. YoY construction jobs are up 202,000, also a deceleration from last summer. Residential construction jobs, which are even more leading, rose by 4000.
  • temporary jobs rose by 2200.
  • the number of people unemployed for 5 weeks or less rose by 240,000 from 1,961,000 to 2,201,000. The post-recession low was three months ago.

Wages and participation rates

Here are the headlines on wages and the broader measures of underemployment:
  • Not in Labor Force, but Want a Job Now: fell by -279,000 from 5.322 million to 5.043 million
  • Part time for economic reasons: declined by -363,000 from 4.347 million to 3.984 million (NEW EXPANSION LOW)
  • Employment/population ratio ages 25-54: down -0.2% to 79.5%. This has now declined -0.4% from the peak at the beginning of this year.
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.04 from  $23.42 to $23.46, up +3.3% YoY. This is still a slight decline from the recent YoY% change peak.  (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 an average of +13,000/month in the past year vs. the last seven years of Obama's presidency in which an average of +10,300 manufacturing jobs were added each month.   
  • Coal mining jobs declined -100, an average of 8 jobs(!)/month in the past year vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
May was revised downward by -10,000. June was also revised downward by -31,000, for a net change of -41,000.

Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime declined -0.2 hours to 3.2  hours.
  • Professional and business employment (generally higher-paying jobs) rose by 31,000 and  is up +367,000 YoY. 
  • the index of aggregate hours worked for non-managerial workers declined by -0.2%
  •  the index of aggregate payrolls for non-managerial workers rose by 0.1%  
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey rose by 283,000  jobs.  This represents an increase of 1,324,000 jobs YoY vs. 2,246,000 in the establishment survey. This survey, which has been negative three months this year, was a major disconnect from the establishment number. The household survey has a tendency to turn first, and this month it showed up in the establishment survey.
  • Government jobs rose by 16,000.
  • the overall employment to population ratio for all ages 16 and up rose 0.1% to 60.7% m/m and is up 0.2% YoY.          
  • The labor force participation rate rose 0.1% from  62.9% to 63.0% m/m and is up +0.1% YoY.

SUMMARY

This was a decidedly mixed report, but the big positives were in the coincident category, while the biggest negatives were in the leading category.

The positives included a new low in the underemployment rate, including a new low in involuntary part time employment, and continuing if modest gains in the three most leading job categories. The household jobs number also has jumped higher for the second month in a row.

But the negatives were more important in my opinion. Most importantly, the average manufacturing workweek declined seriously, and is down -1.0 hour from its peak, which has almost always presaged a recession. Overall goods producing jobs were only up 16,000, a pathetic share of the total market. The prime age employment to population ratio is now in a significant declining trend from its January peak. Revisions also continued to be negative, and the YoY change in the household jobs survey remains much lower than the establishment survey, two trend changes that have a tendency to change at turning points. The YoY change in the establishment survey is also decelerating.

So, while the headline jobs number continues to be quite good, the underlying internals continue to be most consistent with a producer-led serious slowdown.

Thursday, August 1, 2019

July ISM manufacturing, June residential construction both better than expected


 - by New Deal democrat

We got two important leading indicators this morning. Both were better than expected.

First, July data started out with an ISM manufacturing index reading that declined slightly to 51.2, but remained above the neutral level of 50.0. Even more important, the new orders subindex rose slightly to 50.8:


Manufacturing as measured by this index, as well as the regional Fed indexes, has been slow, but has doggedly resisted going into contraction.

June construction spending declined, as did the component of residential construction. But the good news here is that there were substantial upward revisions to the last few months, so the final number was about 1% higher than the initial reading for last month:


Construction spending follows permits and starts with a lag, but is much less noisy. I don’t think we’ve reached bottom yet in this metric, but with the revisions the June number has to be treated as a positive.

One last thing: looking ahead to tomorrow’s employment report, the American Staffing Index had the worst YoY reading of the year so far this week, at -3.7%:



So I’m expecting weak numbers for the leading manufacturing, residential construction, and temporary employment sectors tomorrow, at least as compared with last year, with the most likely negative number being in temporary employment.

Initial claims for July remain lower, thus positive


 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update. [NOTE: I’ll add the relevant graphs later.] UPDATE: graphs added.
Initial jobless claims last week were 215,000. This is in the lower part of its range for the past 18 months. As of this week, the four week average is 5.0% above its recent low: 


Last July, initial claims averaged 215,250. Thus the monthly YoY comparison, at 211,500, or -2.7% lower, and so also remains positive: 


Finally, let’s compare the YoY% change in initial claims (blue) with continuing claims (red):


Comparisons have been  getting closer to crossing the threshold from lower to higher,  but for the past several weeks have trended a little lower, which is more positive.  This. week the  comparison was -2.7% YoY.  So far - this is most consistent with the 1984, 1994, and 1996 slowdowns, and not a recession.

Wednesday, July 31, 2019

The housing choke collar


 - by New Deal democrat

I have a new post up at Seeking Alpha, discussing how, even though sales went down last year, and have already bottomed, house prices have as usual, followed into decline with a lag.

Beyond that, I discuss the concept of a “housing choke collar,’ similar to the “oil choke collar” I used to write about in 2010-14, whereby prices repeatedly approach the tipping point of unaffordability, causing sales to drop off, causing interest rates and prices to decline, making housing more affordable ... and the cycle repeats.

One item that didn’t make it into that article, because I was trying to be concise and not digress, was this graph of the median income of renters that Kevin Drum posted a couple of weeks ago:


Kevin Drum has repeatedly been trying to make the case that, really, housing hasn’t gotten expensive at all compared to historical values — and gotten a lot of blowback (correctly, imo). His take on the above graph is that it shows that renters aren’t stressed at all.

I think the graph actually shows that buying a house has gotten so expensive that it has been prices out of an increasing slice of middle-class incomes, and so people higher up the income scale have been forced into renting.

Anyway, as usual clicking over and reading my piece at Seeking Alpha should bring you up to date on the housing market, and helps me out for my efforts with a little cash in my wallet.

Tuesday, July 30, 2019

June 2019 personal income and spending


 - by New Deal democrat

The wage-earner/consumer remains in decent shape, and a lack of inflation (continued low gas prices!) continues to be able to hide a multitude of sins. That’s the message from this morning’s June report for personal income and spending.

Nominally, income rose +0.4%, while spending rose +0.3%. Since inflation as measured by the PCE price index only increased 0.1%, that means both real income and real spending rose +0.3 and +0.2%, respectively:


Here’s the same data YoY:


As I’ve written about many times over the past ten years, earlier in the cycle retail sales tend to grow more than the broader measure of personal spending; later in the cycle retail sales decelerate first. Here’s what that looks like updated through June:


This continues to look like a later-cycle consumer who is in pretty decent shape for the moment. And probably will be until either inflation picks up, or international trade weakness bleeds into a broad producer-led slowdown.

One final note. Something interesting is happening with the savings rate (i.e., the percentage of their income that people don’t spend) — it has been gradually rising, by a total of 2%, over the past several years. Why is that interesting? Because, here is the long term picture:


An increase in personal saving over the course of an economic expansion is something that hasn’t happened in almost 50 years! I’m not sure what exact dynamic is in play, so I won’t commment further. But it is very interesting, and I’m mulling it over.

Monday, July 29, 2019

Trump’s trade wars can still lead to a producer led recession


 - by New Deal democrat

I wrote a piece last week for Seeking Alpha explaining that, while the consumer side of the economy is doing reasonably well, a recession could still com in via the producer side.

https://seekingalpha.com/article/4278010-producer-led-recession-remains-viable

As usual, clicking over and reading should be educational for you, and puts a penny or two in my pocket.

Thus, the idea that no recession can happen absent a 20% YoY slide in new home sales is not correct. In fact, the 2001 recession happened with only a 10% decline from the very top to bottom in sales (and less than that YoY) that ended about 6 months before the recession even began. The decline in new home sales from top to bottom in 2018 was similar.

One item that didn’t make it into that post was to note that the ISM manufacturing index, especially the new orders subindex, should give early warning of any producer downturn.


ISM won’t let FRED publish their data anymore, so here’s a graph I created back in 2012 or so showing the relationship going all the way back to 1948. Note that the new orders subindex can decline to about 45 and still be a false positive. In 2000-01, it declined to 40 before the recession actually began:


As of last month it stood at exactly 50.0, as shown in the more updated graph of the new orders subindex from Briefing.com:

The July ISM index will be released on Thursday. The average of the regional Fed indexes is a hair above 0, with the final region - Texas - due to report later this morning. I’ll update the average once they report. 
UPDATE: New orders in the Texas manufacturing survey increased slightly. This is enough to keep the average of the five regions just slightly positive.

Saturday, July 27, 2019

Weekly Indicators for July 22 - 26 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The short leading indicators have been particularly noisy recently, and they changed again in the past week.

As usual, clicking over and reading not only should be educational for you, but helps reward me with a penny or two for my efforts.

Friday, July 26, 2019

Both long leading components of Q2 GDP declined UPDATED with revisions and further comments


 - by New Deal democrat

The headline number for the first estimate of real GDP in Q2 2019 was 2.1%, as I’m sure you’ve read elsewhere.

As is usual, I’m not so interested in what is, after all, what the view in the rear view mirror is, as what the leading components can tell us about what lays ahead.

In that regard, both leading components of GDP declined.

- Real private fixed residential investment declined at a -1.5% rate annualized. This is the 6th quarter in a row of a decline in that number. In the past half century, declines this long have typically been seen either right before or right after a recession has started - although the magnitude of the decline has been smaller.

UPDATE: Here is private fixed residential investment measured both nominally and in real terms as a share of GDP:

Nominally this is down about 5% from peak; in real terms about 10%. This is far short of what is typically the case typically going into recessions, but it *is* on par with the producer-led  2000-01 period.

- Proprietors income (a proxy for the more reliable corporate profits, which won’t be released until next month) rose 0.6% nominally. Since the GDP deflator rose 2.2%, this means that “real” proprietors income declined. UPDATE: the 2.2% figure was annualized. Thus the “real” number was essentially flat, but is below its recent peak of Q4 2018:


I will update later once graphs are available. For now, the important takeaway is that one long leading indicators in the GDP release declined, and the second was flat but below peak level,  *consistent with* (but not necessarily implying) a recession either being imminent, or possibly not occurring until next year.

Thursday, July 25, 2019

Initial claims ending July 20: still positive


 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.


Initial jobless claims last week were 206,000. This is close to the bottom range for the past 18 months. As of this week, the four week average is 5.0% above its recent low: 



and at 213,000, is 4,500, or -2.1%, lower than this week last year: 



This remains positive.

Last July, initial claims averaged 215,250. Through the first three weeks, it is 210,000 this year, which is also positive: 



Claims in the final week would have to be about 230,000 or higher for the entire month of July to be negative (higher) YoY.

Finally, let’s compare the YoY% change in initial claims (blue) with continuing claims (red):



Comparisons have been  getting closer to crossing the threshold from lower to higher,  but for the past two weeks have trended a little mobster.  This. week the  comparison was -2.9% YoY.  A longer term view continues to show that - so far - this is most consistent with the 1984, 1994, and 1996 slowdowns, and not a recession:

Wednesday, July 24, 2019

Housing has bottomed


 - by New Deal democrat

With the release of new home sales this morning, and existing home sales yesterday, it is increasingly apparent that housing has bottomed - just as I said a number of months ago that it would sometime this spring.

To the graphs! New home sales (blue in the graph below) bottomed last October, at 557,000 units annualized. As of June, they were at 646,000:   


This isn’t as good as earlier this spring, but is better than every other reading in the past 12 months. Meanwhile prices, which typically lag sales, bounced back from May’s 12 month low, but it is not clear at all if the trend is reversing yet.

Here’s the same data presented YoY, so that it is easier to see the trend:


Both sales and prices have bounced back to positive (sales) or unchanged (prices) YoY from their worst comparisons last autumn.

Meanwhile existing home sales declined m/m, but have clearly rebounded off their lows five months ago:




And prices of existing homes, which aren’t seasonally adjusted, rose 4.3% YoY:



At this point the only home sales metric which has not come back from lows is total housing permits, which made a new low in June, due to a big downturn in the very volatile multi-unit permits. Single family permits, which are a less volatile and more reliable metric, are above their low from two months ago. [See my discussion last week.]

In short, lower mortgage rates have put a bottom beneath the housing market.

Tuesday, July 23, 2019

My forecast for the rest of 2019 is . . . .


 - by New Deal democrat

. . . up at Seeking Alpha!

I’ll be doing my long term forecast through mid year 2020 once Q2 GDP comes out on Friday. It’ll probably get posted sometime next week.

P.S. Sorry for the lack of posting yesterday. I submitted the above to SA on Sunday, but they didn’t get around to putting it up until late yesterday afternoon.  If I have the energy, I’ll put up an extra post maybe this afternoon.

Sunday, July 21, 2019

How today’s Democratic ‘Squad’ is a direct ideological descendant of the original 1850s Republicans


 - by New Deal democrat

Nothing is ever really “new.” Today’s ‘Squad’ of young Democrats is the direct ideological descendant of the original 1850s Congressional Republicans. That is one of the important lessons of Joanne Freeman’s “The Fields of Blood,” about the increasing threats of, and actual incidents of, violence in the US Congress between the 1830s and the Civil War. 

Just as today, there were differing economic and social divides in America. Economically there was a struggle for power between the merchant class and farmers. Socially the increasingly contentious issue was that of slavery. At least beginning with Andrew Jackson’s 1828 Presidential election victory, the Democratic Party was the voice of farmers. The ex-Federalists and the nascent Whig party became that of commerce.

But there were northern and southern branches of each party, defined in how they stood on slavery. The story of the 1830s through 1850s is how that moral issue moved to the forefront, splitting both parties, and ultimately giving rise to the Republicans. This is very much the same paradigm as the “great sort” that took place between the Democratic Party and the GOP between 1980 and 2016 (if not 2008).

Not only is that, but reminiscent of polls over the past 10 years, in the 1830s and 1840s  northerners, especially northern Whigs, wanted to settle disputes civilly, while especially southern Democrats were willing to threaten, and even use, physical force to get their way.

Most importantly, dueling was accepted in the south as a way to defend one’s “honor,” while in the north it was looked upon as unseemly. Southerners used this to their advantage, knowing that northerners would back down in the face of a challenge to a duel. This first came to a head when, in 1838, Maine Representative Jonathan Gilley accepted the challenge of Kentucky Representative Williams Graves. Neither really wanted to duel, and both were poorly served by their seconds, who at crucial moments failed to resolve the situation, but the bottom line is that Graves shot and killed Gilley. Sectional debate on the floor of Congress had finally gone all the way to causing a death. 

And just as in our present era, one side was especially willing to break norms in order to get their way on their biggest issues. One analog to Mitch McConnell now was James K. Polk, who promised in 1844 that he would lower tariffs that hurt farmers, acquire California and the Oregon territory, and allow Texas into the Union. Of course, a  big reason for the acquisition of southwestern lands was to allow the expansion of slavery to new states, which is why both the venerable John Quincy Adams and a young Abraham Lincoln opposed the Mexican War. A second norm-breaker was Stephen Douglas, who blew up the Missouri Compromise even before the Dred Scot case, advocating that territories themselves should choose whether they would allow slavery or not, which ultimately succeeded in the Kansas-Nebraska Act. 

Finally the north had had enough, and elected Representatives and Senators who vowed not to be cowed. Here is Freeman’s discussion of the arrival of the first Republicans elected to Congress in 1855:

As inchoate as this new party was, the arrival of an explicitly Northern opposition had an enormous impact on Congress. Not only did the number of fights spike precipitously after 1855, but their dynamics fundamentally changed. Republicans promoted themselves as a new kind of Northerner who was willing to fight back, and they were true to their word. They fought to wrest control of Congress and the Union from the Slave Power.

As an example, Freeman cites the contest for Speaker in 1859. Southerners threatened violence if a Northerner won the post. Pennsylvania Republican Thaddeus Stevens

said that he didn’t blame Southerners for their threats, ‘for they have tried it fifty times, and fifty times they have found weak and recreant tremblers in the North who have been affected by it.’ When Stevens’ quip brought [Georgian] Martin Crawford to his feet uttering threats, Stevens added, ‘That is right. That is the way that they frightened us before.’ At this, Crawford headed toward Stevens .... Within seconds, Republicans and Southern Democrats were rushing down the aisles, several of them reaching for guns.

In addition to the famous caning by Sen. Preston Brooks of Sen. Charles Sumner, there were more than a dozen fights in the Thirty-Sixth Congress. In one incident, Southern Democrat Roger Pryor challenged Republican John Potter to a duel. He was surprised when Potter not only accepted but chose Bowie knives as weapons. Pryor backed down, citing the “vulgarity” of the weapon, and northerners rejoiced.

As Freeman notes, Republicans “did so with an approving Northern public looking on.” Meanwhile, shocked Democrats reacted with apoplexy to the Republican challenge, caricaturing them as lunatics and radicals.

A political faction entrenched in power for a generation or more being challenged by new generation of implacable opposition sounds exactly like the reaction of the GOP to the ‘Squad’ today. 

Just as then, I believe that the new unwavering and determined opposition will ultimately carry the day, although it may be done “one funeral at a time.”  But also just as then, I wonder how big a Constitutional rupture may occur along the way.

Saturday, July 20, 2019

Weekly Indicators for July 15 - 19 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There were a number a changes among the short leading indicators this week at the margins, in a somewhat surprising direction. Since I’ll be posting my semi-annual updates of my short and long term forecasts over the next week or two, there is a lot for me to think about!

Anyway, as usual, clicking over and reading should be educational for you, and also rewards me a little bit for the effort I put into this enterprise.

Friday, July 19, 2019

My updated look at housing sales and construction


 - by New Deal democrat

My midyear 2019 update on housing construction and sales is up at Seeking Alpha.

Among other things, I go through nine metrics and show the order in which they typically turn, with very significant lags between the first and last indicators. As a result, housing is telling us very different things about the economy over the next 6 - 9 months vs. the next 12 - 18 months.

Judging by the comments there, people still want to see the prices as leading sales, even though almost always sales turn up or down first before prices do.

As an aside of that, Wolf Richter has a very good piece up about the downturn in foreign purchases of US housing. Well-heeled foreigners, and in particular Chinese buyers, have been very important marginal drivers of the high end real estate market, especially in California, New York, and Florida.

That foreign buying has fallen off a cliff in the last year or so probably explains a lot of the reason why the median price of new homes has fallen so quickly and dramatically along with the 2018 downturn in new home sales, as shown below:



Thursday, July 18, 2019

Initial claims still weakly positive, most consistent with slowdown


 - by New Deal democrat
I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.

Initial jobless claims last week were 216,000. This is average for the past 18 months. As of this week, the four week average is 8.6% above its recent low: 


and at 218,750, is only 250, or -0.1%, lower than this week last year: 


This remains positive.

Last July, initial claims averaged 215,250 (red). Through the first two weeks, it is 212,000 this year (blue), which is also positive:


So this too remains positive.

Finally, let’s compare the YoY% change in initial claims (blue) with continuing claims (red):


Comparisons have been  getting closer to crossing the threshold from lower to higher,  but this week moved lower to -3.8% YoY.  A longer term view shows that - so far - this is most consistent with the 1984, 1994, and 1996 slowdowns, and not a recession:

Wednesday, July 17, 2019

June residential construction report a decidedly mixed bag


 - by New Deal democrat

The Census Bureau’s report on residential construction for June was a decidedly mixed bag. Here’s their graph of permits, starts, and completions:


On the positive side, even though starts declined slightly in June, the three month average, which is the best way of looking at this measure due to its noisy m/m readings, improved to the best number in 13 months. Starts are real economic activity, and bode well for 2020.  Single family permits (not shown above) - the least noisy of all the leading housing indicators - also improved to 813,000, suggesting that April’s reading of 786,000 may have been their low.

On the negative side, total permits declined to 1.22 million annualized, which is the lowest reading in over 2 years, and is -13.2% below their March 2018 peak of 1.406 million. This is a bigger decline than that which preceded the 2001 recession. In other words, it is consistent with what might be seen in advance of a producer-led recession.

Additionally, total completions (green in the graph above) fell to a five month low. Since residential construction employment generally turns shortly after completions turn, this renewed decline in the past several months means that we can expect to see declines in this leading employment sector as well in the next several months.

As I said at the beginning, a very mixed bag. I’ll have a more detailed post up at Seeking Alpha probably tomorrow.

Tuesday, July 16, 2019

June consumption was strong, while production was weak


 - by New Deal democrat

This morning’s retail sales and industrial production releases for June are consistent with my take that the consumer sector of the economy is doing OK, while the production sector remains in trouble.

Let’s start with retail sales. 

Retail sales are one of my favorite indicators, because in real terms they can tell us so much about the present, near term forecast, and longer term forecast for the economy.

This morning retail sales for June were reported up +0.4%, while May was revised downward by -0.1%. Since consumer inflation increased by less than 0.1% last month, through the magic of rounding, real retail sales also rose +0.4%. The strength of the past two months means that YoY real retail sales are now up +1.7%.

Here is what the last five years look like:


Next, although the relationship is noisy, because real retail sales measured YoY tend to lead employment (red in the graph below) by a number of months, here is that relationship for the past 25 years, measured quarterly to cut down on noise:


Now here is the monthly close-up of the last five years. You can see that it is much noisier, but helps us pick out the turning points:


I still expect some softness in the employment reports in the next few months, but the renewed strength in real retail sales means that it may pass.

Finally, real retail sales per capita is a long leading indicator. In particular it has turned down a full year before either of the past two recessions:


As these made yet another new high in June, that is an argument against any actual downturn in the economy for the rest of this year.

But if the consumer side of the economy looks pretty good, the production side continued to lag in June, as industrial production as a whole was unchanged. Manufacturing production did increase +0.4%:



On the one hand, both may have bottomed in April, following the “mini-recession” brought on by the January government shutdown and some trade war fallout. On the other, both remain significantly below their expansion peaks set six months ago.

If an actual downturn is going to begin in the production sector, it will show up first in the new orders portions of the regional Fed indexes, the average of which has remained above zero so far.

Monday, July 15, 2019

The consumer vs. the producer economy


 - by New Deal democrat

Prof. Edward Leamer wrote over a decade ago that, in a consumer led recession, first housing turns, then vehicle sales, then other consumer goods.

What do home and vehicle sales tell us now about the economy, vs. corporate profits? This post is up at Seeking Alpha.

As usual, clicking over and reading puts a penny or two in my pocket.

Sunday, July 14, 2019

WARNING: another “debt ceiling debacle” is looming, and could cause nearly immediate recession


 - by New Deal democrat

It’s time to start to get seriously worried about another “debt ceiling debacle.” In 2011, the GOP refused to authorize a “clean” debt ceiling hike. The hike in the debt ceiling, for those who may not know, is necessary for the US government to pay debts that *it has already incurred.*

In 2011, as a result of the impasse, US creditworthiness was downgraded from AAA to AA. Consumer confidence plummeted:



Note the next largest spike downward occurred during the government shutdown at the beginning of this year.  
  
In both cases - the debt ceiling debacle and the government shutdown - Long bond rates (mortgages, shown in blue below) plunged in a “flight to safety,” and stock prices (red) also plunged about 15%:



We know, of course, that the stock market is not the “real” economy. In 2011, consumers nevertheless continued to spend (red in the graph below) and industry continued to expand (blue), but during the government shutdown at the beginning of this year, both went sideways or declined:


As I write this, it is almost certain that the economy is already in a slowdown. It is dicey enough that, although I see slowdown as the most likely scenario, I already am on “Recession Watch” for a possible downturn centered on Q4 of this year. Another knock like the “mini-recession” we had from December through February as the result of the government shutdown is the last thing we need.

But we may be about to get it. Congress is scheduled to go on recess after August 2, and not return until after Labor Day in September. According to various news organizations,

Treasury Secretary Steven Mnuchin put his request on paper for Congress to act on the debt ceiling before the August recess, writing to congressional leaders Friday that there’s a chance Treasury could run out of cash in early September.


Pelosi and Republican leaders are looking to strike a multi-year deal to lift the nation’s $22 trillion debt limit and nix Congress’ stiff spending caps, which threaten billions of dollars of cuts at year’s end.
“I am personally convinced that we should act on the caps and the debt ceiling,” Pelosi told reporters on Thursday evening, adding that it should be done “prior to recess.”

But here is a giant sticking point:



Meanwhile, Mitch McConnell, who may be evil but is nevertheless by far the shrewdest operator in Washington, is keeping his cards close to his vest:

[telling] a weekly leadership press conference that lawmakers wouldn’t let the United States default on its debt, but he didn’t offer a clear pathway to approving a debt ceiling increase.
“Time is running out, and if we’re going to avoid having either short- or long-term CR or either a short- or long-term debt ceiling increase, it’s time that we got serious on a bipartisan basis to try to work this out [...]” McConnell said. A CR, or continuing resolution, would fund the government at current spending levels.
Asked if Congress had to raise the debt ceiling before the August recess, McConnell sidestepped the question, saying lawmakers are in close contact with Mnuchin about the timeline but that he doesn’t “think there’s any chance that we’ll allow the country to default.”

Way back in 2011 I railed against Obama enabling the GOP’s debt brinksmanship, arguing that it only set a precedent for further blackmail. And here we are. 

But as cagey as McConnell may be, as we saw with the government shutdown, Trump is not only willing to hold hostages, but to execute some in order to try to get his way and please his base. All it will take is a few segments on Fox TV for him to once again blow up any deal McConnell brokers.

 There are three workweeks left until Congress’s summer recess. If for any reason we actually go over the brink this time, there is an excellent chance that the slowdown almost immediately tips into recession.