Sunday, December 11, 2016

Five graphs for 2016: final update

 - by New Deal democrat

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

#5 The Yield Curve

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

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

#4 The trade weighted US$

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

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

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

#3 The inventory to sales ratio

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

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

#2 Discouraged workers

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

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

#1 Underemployment and wages

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, until recently nominal increases  averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power.  
There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers as discussed above.

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

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

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

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