The consequences of mafia style bust-outs and military belligerence for interest rates

 

 - by New Deal democrat

While there isn’t any big economic news today, there certainly was action overnight in response to the latest TACO. As I type this, oil is back down to $90/barrel, and stock futures are soaring. This for something (correctly I think) framed as a “fragile cease fire” by J.D. Vance.

But let’s look at some of the economic damage that is likely to persist.

In the first place, the mafia-style bust out that is the ballooning US budget deficit has definitely put an end to the 40 year downdraft in Treasury yields. The below graph shows yields on the 30 year (dark blue) and 10 year (light blue) Treasurys as well as the Fed Funds rate (red):

Notice that the 10 year bond is about equal in yield to what it was during 2023-24 when the Fed funds rate was at its peak. And it did not react at all to the last two Fed rate cuts. The record of the 30 year is even worse, as yields have acutally trended higher even as the Fed funds rate has been cut. This is all about the “bond vigilantes” waking up and demanding more interest to hold on to bonds from a government that at the moment appears to think it can issue infinite amounts of paper. This can be laid squarely at things like the “Big Beautiful Bill” as well as the astronomical military build-up.

The increase in yields has also hit mortgage rates, which typically follow longer dated Treasurys. As of one week ago, they had risen about .5% to about 6.5%:

And with a several week delay, mortgage applications responded. They have been trending down for several weeks, and this morning’s update showed both purchase mortgage applications (blue) and refinance applications (gray) lower YoY:

Here is a five year view of the same data:

showing that, while the increase in mortgage rates has not knocked either type of application down to their 2023 nadirs, but has effectively halted the rebound.

Tomorrow we will get personal income and spending for February, and on Friday we will get the March CPI. Both will be important, and the latter is likely to be absolutely lit!

March ISM reports show stagflationary expansion — light on the “stag-,” heavy on the “-flation”

 

 - by New Deal democrat

 

As I’ve previously noted a number of times, one of the more surprising developments in the past few months has been the resilience of manufacturing. After taking a beating following “Liberation Day” one year ago, companies adapted and resumed production if anything at an even more brisk pace.

That was apparent as recently as the preliminary data on new factory orders released this morning for February. While overall new orders for durable goods declined -1.4% for the month (blue, right scale), core capital goods orders rose 0.6% to a new post-pandemic record (red, left scale):

On a YoY basis, headline new orders were up 7.3%, while capital goods orders were up 5.1%, continuing the last six months’ trend of the best YoY growth since the beginning of 2023:

A similar, and more complex, story was told by the ISM manufacturing and services indexes for March. The headline number for services declined to 53.9, still a good showing (recall that any number above 50 indicates expansion), and for manufacturing came in at 52.7, the best number since the summer of 2022 (in the graphs below, the services number is in blue, the manufacturing number in gray):

And the more leading new orders subindexes showed even more strength, with services coming in at a very strong 60.6, the highest reading in three years, while manufacturing new orders declined to a still expansionary 53.5:

For forecasting purposes, I use the three month average of the series, with a 25% weighting to manufacturing and 75% to services. The weighted average of both the headline and new orders components are the strongest in three years.

If the present and leading conditions are without doubt positive, what about the stagflationary scenario?

Well, the prices paid components both came in sharply strong, with services at 78.2, and manufacturing even slightly higher at 78.3, both the highest since June 2022:

If both the goods producing and services providing sectors of the economy were being clobbered by inflation in March, the picture for employment was considerably weaker. While the “less bad” trend in manufacturing employment continued, with a slightly contractionary 48.7, still its second best reading in the past 12 months after January’s, the employment subindex in services declined sharply to 45.2, its worst reading since the pandemic except for December 2023:

This is somewhat foreboding for the official employment metrics for the next several months. According to Jill Coronado of the University of Texas at Austin, “the ISM non-manufacturing employment index, particularly the three month average has some significant predictive power.” Here is her accompanying graph:

The three month average of 49.1 isn’t as low as it was last summer, but nevertheless predicts slight contraction, particularly of services providing employment.

To summarize, on the bright side, left to their own devices the manufacturing and services data indicate not just continued expansion, but even more robust expansion. But it is a stagflationary expansion, with simultaneously moribund employment and widespread price increases.

And of course, neither have been left to their own devices. Even the March data only marginally reflects the impacts of the Iran war. Those are likely to show up much more drastically in the April and May reports. To put it another way, “Buckle your seatbelt, Dorothy, ‘cause Kansas is going bye-bye.”

The “real,” wage adjusted price of gas isn’t at privation levels yet

 

 - by New Deal democrat

Back in the “before” days, as in January, before the Iran war, I wrote about how low gas prices were actually a tailwind for the economy. Because since the start of the Millennium over 25 years ago, they had only been so low compared with average hourly wages on only 3 occasions: after the 2001 recession, late in the Great Recession, and during the COVID lockdowns. Put another way, it only took about 7 minutes of work to buy a gallon of gas. This leaves a lot left over for other consumption - just as it did at the end of the two non-COVID recessions.

Needless to say, that has changed. But by how much, really? On the one hand, as I’ve pointed out previously, on a percentage basis this is the biggest one-month spike in gas prices since the 1970s. We’ll find out just how badly that effected the CPI for March this coming Friday.

But how much of the “tailwind” has been taken away? That’s what the updated graph below, of the “real” cost of gas compared with average hourly nonsupervisory wages, shows:

The “size” of the spike is about equal to the 2005 Katrina spike, and less that the 2022 Ukraine invasion spike. But in relative terms, it has not come anywhere close to the 2008 spike that helped exacerbate the Great Recession, nor the Ukraine invasion spike. Nor, for that matter, what I used to call the “Oil Choke Collar” of the early 2010’s, when gas prices put a lid on the velocity of any expansion in the early years of the last recovery. In order to approach the level of those shocks, we would need to see gas prices of $5/gallon, at minimum.

The gas price information doesn’t go all the way back to the 1970’s, but the price of oil, specifically West Texas Crude, does. So here is the same graph, of oil prices relative to average hourly nonsupervisory wages, going all the way back to before the first oil shock:

Here you can see that just before the start of the Iran war, the “real” price of oil was equivalent to the levels it was at from 1986-99, when gas prices were not a consumer issue at all. The current spike has not taken us back up to the levels of either the first Gulf War spike of 1990 nor the second oil shock of 1979-80.

The bottom line here is that, although this price spike is enough to marginally change consumer behavior, it isn’t yet at the point where in the past it has created a sense of real privation (in 1974 the spike was accompanied by an embargo that resulted in gas rationing). That isn’t to say it couldn’t get there in another month or two. Although I won’t bother with a graph, according to GasBuddy the national average has risen as much as another $0.12 in April up to $4.11. To reiterate, my sense is that a real sense of privation isn’t likely to kick in unless gas prices reach $5/gallon.

Weekly Indicators for March 30 - April 3 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

After zigging upward last week, interest rates zagged downward - but not as much - this week, enough to change the ratings on some interest rate sensitive indicators, like mortgages. And consumers continue to spend, despite all the shocks and sluggishness in things like the labor market in the past 15 months.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and give me a little extra jingle in my pocket next time I go to the local bookstore.

March jobs report: the birds that came home to roost play an April Fool’s joke, shrieking “Nevermind!”

 

 - by New Deal democrat

I described two months ago as “the month the birds came home to roost.” Last month, pace Edgar Allen Poe, I said the birds were screeching “recession!”

This month, Poe’s birds decided to play with us, screeching instead: “Nevermind!”

This was a good report with mainly good internals, with one large exception.

Below is my in depth synopsis.

HEADLINES:

• 178,000 jobs gained, the biggest number since December 2024. Private sector jobs increased 186,000, while government jobs declined -8,000. The three month average rose from a puny +6,000 to +68,000.
• The pattern of downward revisions to previous months did continue. While January was revised upward by +34,000, February was revised downward by -41,000, for a net decline of -7,000. 
• The alternate, and more volatile measure in the household report, declined by -64,000 jobs. On a YoY basis, this series DECLINED for the second month in a row, by -561,000 jobs, or an average of -47,000 monthly.
• The U3 unemployment rate fell -0.1% to 4.3%. 
• The U6 underemployment rate rose +0.1% to 8.0%.
• Further out on the spectrum, those who are not in the labor force but want a job now rose by +66,000.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. These were mainly positive:

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, fell -0.1 hour to 41.4hours, but still is now down only -0.2 hour from its 2021 peak of 41.6 hours.

• Manufacturing jobs rose +15,000, only the second increase in the last 12 months.
• Truck driving declined another -800.
• Construction jobs rose +26,000.
• Residential construction jobs, which are even more leading, rose +3,100, continuing the trend of stabilizing since last April.
• Goods producing jobs as a whole rose +43,000.. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again this month, by -4,400, but remained above their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or fewer declined -181,000.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.05, or +0.2%, to $32.07, for a YoY gain of +3.4%, its lowest YoY% gain since the pandemic. While this remains higher than the YoY inflation rate through February, even that is among the lowest gains in the past three years — and it is very much likely to change once March’s CPI is reported.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers increased +0.2%, and is up only 0.7% YoY, below average for the past two years.

• The index of aggregate payrolls for non-managerial workers rose 0.3%, and is up 4.1% YoY, close to its post-pandemic low of 4.0% set last June.

Other significant data:

• Professional and business employment (for a change!) rose +2,000. These tend to be well-paying jobs. This remains above its October low, it remains lower YoY by -0.4%, which in the past 80+ years - until now - has almost *always* meant recession.
• The employment population ratio declined -0.1% to 59.2%, vs. 61.1% in February 2020, and its lowest since October 2020.
• The Labor Force Participation Rate declined -0.1% to 61.9% , vs. 63.4% in February 2020, and its lowest since November 2020.

SUMMARY

As I wrote at the opening above, this was a good report, but with a few significant negatives. 

Let’s start with the good, which obviously include both the headline number and the decline in the unemployment rate and short term unemployed, as has been telegraphed by extremely low initial jobless claims. Goods producing jobs increased, including manufacturing, construction, and residential construction jobs. Professional and business jobs had a positive month, for a change. 

There were some negatives, including a decline in the manufacturing work week, EPOP and LFPR. Truck driving jobs continued to decline. And the underemployment rate rose slightly. 

But the most significant negatives had to do with wages. The increase in hourly nonsupervisory wages was among the lowest since the pandemic, and the YoY% change was the lowest. Aggregate hours for nonsupervisory also had a relatively small gain. Which means that, even nominally, the gain in aggregate nonsupervisory payrolls was close to its post-pandemic low. Consumer prices last March were unchanged. If the Cleveland Fed’s estimate of a 0.8% gain this March is accurate, that will mean March CPI will come in a 3.2% YoY. The estimated *real* gain in YoY nonsupervisory payrolls would only be 0.9%, the lowest since the pandemic, and a major cause for concern.

So it is very possible that this rosy-looking outlook could change by the end of next week, but for today the birds that came home to roost have played an April Fool’s joke: “Nevermind!”