Saturday, February 6, 2016

Weekly Indicators for February 1 - 5 at

 - by New Deal democrat

My Weekly Indicator post is up at at .  The big news this week was what happened to the US$.

Friday, February 5, 2016

Ed Morrissey Should Really Stop Writing About Economics

     Y'know ... Ed Morrissey of Hot Air is consistent.  For the last 8 years (which, interestingly enough, corresponds with the Obama presidency) Ed has reported that the economy has been terrible -- just terrible.  Ed will take any statistic that has the potential for negative spin, and do just that -- spin it as negatively as possible.  I knew when the headline employment number came out, Ed would be all over it. And, sure enough, he printed "Meh: US added 151,000 jobs in January" within hours of the BLS release.

     First of all, let's look at Ed's actual qualifications to write about this topic.  Does he have any meaningful economic background or is he simply a blogger with a strong political angle?  Here's a link to his Wikipedia page, and the answer is "no" on the qualification question.  There is no mention of a college major or minor in econ (in fact, there is no mention of any higher education), nor is there any mention of a job in finance.  Econ isn't something you can teach yourself.  Most of the people at the Federal Reserve and in financial services are at least econ minors.  Most, in fact, are CFAs and Ph.Ds.

     Most of Ed's story is your standard "cut and paste" job, meaning there is little actual self-produced analysis.  What is "original" is this specific mentions of "underemployment:"

Numerous news services heralded the a drop in U-3 rate of unemployment to 4.9%, but the number of people not in the workforce also rose by 360,000 people from last month (table A-16). That follows an increase of 284,000 the previous month. Those not in the labor force who want a job increased by 461,000, and that follows an increase of 379,000 in the previous month. The latter measure had been falling in 2015, but has reversed itself by 840,000 in two months — both in the 0.7%-growth-rate Q4.

Ed is one of the many people who, over the last few years, found the labor force participation rate. More specifically, he noticed it was dropping.  However, let's take a look at the longer trend:

Somehow I doubt this graph was even on Ed's radar during the Bush years when it started dropping. However, the pace of acceleration has increased since the end of the recession.

This leads to two questions: why did it increase and why is it decreasing?  It started to rise for two reasons: women entered the labor force and the baby boomers hit their peak earnings years.  Why is it declining now?  Well, there's actually been a ton of research on the topic (done by people who actually have a background in econ).   Interestingly enough, Ed has yet to link to any solid research on the topic.  Invictus over at the Big Picture blog has got a great set of links on the topic here.  Here's the general conclusion:

At least 50% (and probably more) is caused by retiring baby boomers.

Then there's the huge drop in working teenagers, largely because they're in school (which is a good thing -- y'know -- they're learning):

The increase in life spans means some people keep on working because they like it.

There is a percentage of people ages 24-54 (the prime working age) that have left the labor force.  Most of them are people with a high school or less educational level who used to work in blue collar industries who have been left behind due to globalization and automation.  
These data points aren't on Ed's radar screen.

So, here's the real story.  Economists and demographers have known about the LFPR drop for some time.  There has been a ton of scholarly, well-researched articles on the topic.  And their general conclusion is most of the drop can be explained through reasoned analysis and explanation.

In addition, Ed Morrissey is completely unqualified to discuss or write about economics.  There is nothing in his background to indicate he understands the nuances of the science and he's obviously more interested in creating negative political spin than actionable intelligence.  He has yet to post any link to a scholarly article on economics or the markets, instead posting excerpts from news storiees.

This of course won't stop him from writing on econ.  He (unfortunately) suffers from the Dunning Kruger effect.  And his readers will certainly learn nothing meaningful from his "analysis."  All we can do is keep a public record of his gross incompetence in the hopes he will eventually discontinue his efforts.

January jobs report: an hours, wages, and participation surge under the headlines

- by New Deal democrat


  • 151,000 jobs added to the economy
  • U3 unemployment rate down -0.1% to 4.9%
With the expansion firmly established, the focus has shifted to wages and the chronic heightened unemployment.  Here's the headlines on those:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now: up 87,000 from 5.886 million to 5.973 million
  • Part time for economic reasons: down 34,000 from 6.022 million to 5.988 million
  • Employment/population ratio ages 25-54: up +0.3% from 77.4% to 77.7% 
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 from $21.27 to $21.33,  up +2.-%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.)
November was revised upward by 28,000.  December was revised downward by 30,000, for a net change of -2,000. 

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

  • the average manufacturing workweek rose from 41.6 hours to 41.7 hours.  This is one of the 10 components of the LEI and will be a positive.
  • construction jobs 18,000.  YoY construction jobs are up 264,000.  
  • manufacturing jobs increased by 29,000, and are up 45,000 YoY.
  • Professional and business employment (generally higher-paying jobs) increased by 9,000 and are up 620,000 YoY.

  • temporary jobs - a leading indicator for jobs overall decreased by -25,200.

  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by -156,000 from 2,405,000 to 2.249,000.  The post-recession low was set 5 months ago at 2,095,000.

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

  • Overtime was unchanged at 3.3 hours.

  • the index of aggregate hours worked in the economy rose by 0.4 from  104.9 to 105.3. 
  • The broad U-6 unemployment rate that includes discouraged workers was unchanged at 9.9%.
  •  the index of aggregate payrolls rose by 0.9  from 126.9 to 127.8.
Other news included:      
  • the alternate jobs number contained in the more volatile household survey increased by 615,000  jobs.   This represents an increase  of 2,440,000  jobs YoY vs. 2,665,000 in the establishment survey.  
  • Government jobs fell by -7,000.  
  • the overall employment  to  population ratio for all a ges 16 and above rose by .1 to 59.6  m/m and +0.3% YoY.  The labor force participation rate rose  0.1% from 62.6%  to  62.7%  and is down -0.2 % YoY (remember, this incl udes droves of retiring Boomers).  

The headline employment number was a little light this month, but look at the great internals:

  • average wages rose smartly
  • aggregate hours also rose smartly
  • wages and hours for December were revised upward.  This means that real aggregate wages had a big increase, probably over 1% in just one month.
  • part time for economic reasons declined
  • the employment population ratio for prime working ages 25 54 rose by 0.3% and has finally made up more than 1/2 of its loss from the Great Recession

There were only a few negatives:

  • the broad U6 unemployment rate did not fall
  • those not in the labor force who want a job now rose
  • temporary jobs fell

Bottom line:  January was a great month for workers' paychecks. Finally!

Thursday, February 4, 2016

Forecasting the 2016 election economy: it turns out consumers really do vote their wallets

 - by New Deal democrat

For the last 7 months, I have been engaged in a real-time experiement to see if I could use economic indicators to forecast the outcome of the 2016 Presidential election well in advance.

In previous installments,

One of my favorite economic indicators, however, is real retail sales, measured in the aggregate and per capita.  And lo and behold it has one of the best correlations of all with Presidential election results.  It turns out consumers really do vote with their wallets. It is considerably better than using income, probably because it is the acid test of the level of confidence average people have about the economy. As a result, how much of what is in their wallets they are wiling to spend is an excellent predictor of their voting preferences in Presidential elections.

Specifically, during the last 60 years, the following statements have always been true and have collectively always accurately predicted the outcome of the Presidential elections.

  1. If there is no consumer spending recession, defined as at least 2 consecutive quarters' decline in real retail sales per capita, during a Presidential term, the candidate of the incumbent party wins the Presidential election.
  2. If there is a consumer recession, and consumers are spending less per capita at the end of the third quarter of the election year than they were 3 years previously, then the candidate of the incumbent party loses the election.
  3. If there is a consumer recession during the final two years of the Presidential term, the candidate of the incumbent party loses, even if consumers are spending more at the end of the third quarter of the election year than they were 3 years previously.
  4. If there is a consumer recession during the first two years of the Presidential term, but the consumer has completely recovered (which has always happened), the candidate of the incumbent party wins the election.

Here is a table giving the breakdown of real retail sales per capita, ranked in order of strength from Q3 of the first year of the Presidential term through Q3 of the final year of the term, a total of 12 quarters.  I begin with the third quarter of the President's first year in office since voters historically excuse the President for responsibility for the economy until s/he has been in office at least 6 months.

The last two columns indicate whether or not a spending recession, defined as two consecutive quarters of a decline in real consumer spending per capita, occurred during the Presidential term.  If so, I indicate whether that spending recession ended, and if so, when:

YearReal  retail
sales per capita
party vote %
Recovery from
spending recession?
196411.861.3 None ---
197211.461.1Yr1 m10Yr3 m1 
2012 7.752.0None ---
20007.450.3Yr4 m3 No 
19966.654.7None ---
1956 5.157.8Yr1 m3; Yr 3 m10Yr3 m3, No
20044.851.2 None ---
1984 4.859.3 Yr1 m8 Yr3 m6 
1988    4.653.9None  ---
19682.249.6 Yr2 m3 Yr4 m11
1960-2.1 49.9 None ---
1976 -2.8 49.0 Yr1 m7 No 
2008 -5.9 46.3 Yr2 m1 No 
1980-6.144.7Yr2 m12No 

 In general, the stronger the growth in real consumer spending during the 3 year period leading  up to the Presidential election, the higher the percentage of votes for the candidate of the incumbent party.  Further, every time consumer spending growth was negative, the incumbent party's candidate lost.  Every time the consumer spending growth was over 4%, the incumbent party candidate won.

At present were are 9 quarters into the 12 quarter period for the 2016 election.  Real retail sales per capita are up 3.2% since Q3 2013.  If they continue at that pace through Q3 of 2016, they will be up 4.3%, forecasting a win by the Democratic candidate.

Secondly, when consumer spending growth during the three years leading up to the Presidential election was weakly positive (i.e., 4% or less), there was always at least 1 consumer spending recession.  Whether and when the recovery from the downturn happened is vital. If it happened early in the term, the candidate won.  If it happened late in the  term, specifically including the last year before the election the candidate lost.  [Note that while in 1956, such a recession was ongoing at the time of the elction, the overall spending increase for the term was +5.1%.] Probably a weighted average where periods closer to the election get more weiighting than earlier periods would be an improvement in the model, but it is beyond my scope.

In 2015, real retail sales per capita did decline ever so slightly from Q3 to Q4 in 2015.  A one quarter decline is not unusual at all.  If, however, it continues to decline, that will be consistent with a scenario similar to that in 2000, where the candidate of the incumbent party, Al Gore, lost the election although he eked out a slight victory in the popular vote.

To summarize, if consumers vote their wallets this year,  the democratic nominee is likely to win, provided there is no spending recession over the next 8 months.  

Wednesday, February 3, 2016

My forecast for the 2nd half of 2016

 - by New Deal democrat

My forecast for the 2nd half of this year is up at  US$ permitting . . . .

Tuesday, February 2, 2016

Another sign the industrial recession is bottoming: ISM inventories orders

 - by New Deal democrat

The overall most important economic question this year is whether the industrial recession caused mainly by the strong US$ will end, and if so, when?

I have suggested that there are signs of a bottoming out in the spot price of the trade wieghted US$ and industrial commodity prices.  Yesterday we got a third indication in the ISM manufacturing report.

As an initial matter, the inventories component of the ISM index is an excellent coincident indicator for YoY real GDP.  Here are three graphs covering the last 70 years to show that:

Besides being a more timely sign of a Quarter's GDP,  as you hopefully can see in those graphs, the ISM inventories index also  bottoms out sometime between the middle of a recession to a few months after its end.  Most often the bottom is wihin one month of the bottom of the recession.

The inventory index in 2015 made a bottom in October.  Usually - but not always - there is no lower bottom.

Just as important is the relationship between the ISM new orders index and the inventory index. As you can see in the below graphs covering the last 70 years, typically late in a recession the new orders index spikes higher, into expansion,  while the inventories index is still contracting, near the index's ultimate low:

The same pattern holds true for downturns that do not sink all the way into recession.  Here is 1966:

and here is 1985-86, which was also associated with a steep decline in gas prices:

Now here is a close-up on the last few years:

In January the ISM new orders index spiked higher, into expansion,  while the inventories index remained near its low, showing continued contraction in inventories.

Typically both new orders and inventories make V-shaped bottoms.  While it is only one month's data, January is most consistent with new orders exiting the industrial recession, with inventories continuing to contract, but perhaps less intensely, in the next few months.  In short, more evidence of an approaching bottom to the industrial recession .

Monday, February 1, 2016

Consumers have spent about 20% of their gas savings

 - by New Deal democrat

Real personal consumption expenditures rose 0.1% in December, positive but something of a disappointment  compared with the big YoY increase evident in Gallup's consumer spending measure:

This means that personal spending slowed down considerably in the 3rd and 4th quarters compared with the previous 4 quarters (blue in the graph below), particularly as compared with the increase in real personal income (red):

But a longer term comparison shows that it has been the first 3 quarters of 2015 which were the exception:

Over the last 10 years, real personal spending increased on average about 0.15% monthly.  In the first 3 quarters of 2015, it increased by closer to 0.3% monthly.  This was one of the best rates in the entire 10 year period:

Real personal income (red in the above graph) also was above average throughout 2015.

So how much of their gas savings have consumers been spending?  The big decline in gas prices began in summer 2014.  If we norm both spending and income to 100 just prior to that decline, we can compare how much each has increased:

Real income has grown by 6%, while real spending has grown by 4.5%.  In other words, consumers have spent about 3/4 of their increase in income.

But how much of that is gas savings?  In the bar graph above, we can see that in the 12 months before the big decline in gas prices, real income increased by 2.4%, and real spending by 2.7%.  The average annual increase in income has been 3.9%, while spending has averaged 3.0% annualized.  This means that consumers have spent about 20% of their gas savings (+0.3% vs. +1.5%), relatively more in the first half of 2015 vs. the last half.

Sunday, January 31, 2016

John Hinderakar Continues His Long Period of Economic Incompetence

Update: Let's think about this:  As I show below, Minnesota is at full employment with solid, state-wide wage gains above the national average.  And Hinderaker thinks that's bad.  What an idiot.  

John Hinderaker is now the President of the Center of the American Experiment, a think tank.  First, it's obvious his new bosses didn't even look at his past work.  As I've documented, his economic analysis was 100% wrong for an entire year (2014) .

Over at his website, he has a 30 second video up, arguing that Minnesota is actually 30th in job creation.  However, there's a big problem with Hinderaker's cute little video: he's using 2004-2014 as the basis for comparison.  No reputable economist would use that time frame instead, opting for the period of expansion as determined by the NBER.  Why?  Because that's the standard time unit we use in the profession.  Hinderaker's time period is simply pulled out of thin air, probably because it offered a the worst possible performance to "bolster" his claims.

Now, let's go the FRED system to get the data for Minnesota:

The Minnesota unemployment rate peaked a little above 8% at the end of the last recession.  It currently stands below 4%.  Economists generally consider 5% as full employment, which means Minnesota is doing very well, especially considering the the slower pace of this expansion.

As a result, wages and salaries are increasing at a strong rate, rising between 2.5% -5% on a Y/Y basis for the entire expansion.

Above is the annual Y/Y percentage change in Minnesota GDP.   It's slowest pace was 2.9% in 2014.

So, the state is at full employment, wages are growing far above the national average, and total growth is very strong.

As usual, Hinderaker has no idea what he's talking about.

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