Saturday, August 20, 2016

Weekly Indicators for August 15 - 19 at

 - by New Deal democrat

My Weekly Indicators post is up at

As befitting the dog days of summer, there has been little change in the overall picture.

Friday, August 19, 2016

Real aggregate wage growth: August 2016 update

 - by New Deal democrat

In my opinion the best measure of how average Americans are doing in an economic expansion isn't jobs, and it isn't wages per hour.  Rather, it is real aggregate wage growth.  This is calculated as follows: 
  • average wages per hour for nonsupervisory workers
  • times aggregate hours worked in the economy
  • deflated by the consumer price index
This tells us how much more money average Americans are taking home compared with the worst point in the last recession.

Why do I believe that this is the best measure of labor market progress?  Let me give you a few examples.

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that's clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let's compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let's compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one -- those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy  that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.

In short, at the end of the analysis, people generally work not for hours, and not for jobs themselves, but for the cold hard cash that is put in their pockets.  That's why I believe that real aggregate wage growth is the best measure of a labor market recovery.

With that introduction, here are real aggregate wages for the entire past 50 years: 

So how does the current expansion compare with past ones?  Here is the graph, normed to 100 at the post-recession bottom in real aggregate wages in October 2009:

To compare, here is a chart I created last year showing the real aggregate wage growth in every economic expansion beginning with 1964:

* start of series

The most recent trough for aggregate real wages was in October 2009.  In the 81 reported months since, real wages have grown 20.0%, or just shy of .25% per month.

If you want to see the graphs for each expansion, just click here

As  shown in the above chart, four of the past 7 recoveries have been better.  Three were worse.  Wage growth per month has improved, but is still lower than almost all of the earlier expansions.  This recovery has been helped by a big increase in the total number of additional hours worked. 

Finally, here is how it compares with the much-vaunted labor recovery of Ronald Reagan the same number of months in:

Currently the Obama labor market recovery only lags by -0.5%, or about -.006% per month.  The  peak in Reagan's wage recoverty, at +21.6%, happened after only 2 more months. If Obama's recovery continues through the end of his term, it will be the second longest wage recovery, and it may yet surpass Reagan's in terms of real aggregate wage growth for average Americans, lagging only the 1960s and 1990s..

Bonddad's Friday Linkfest

A Chart of the 4 primary coincident indicators

Industrial production is now detectably trending upward. In terms of the tradables sector, manufacturing is also recovering, mitigating some of the concern of external drag.

Euro area annual inflation was 0.2% in July 2016, up from 0.1% in June. In July 2015 the rate was 0.2%. European Union annual inflation was also 0.2% in July 2016, up from 0.1% in June. A year earlier the rate was 0.2%. These figures come from Eurostat, the statistical office of the European Union.

In July 2016, negative annual rates were observed in twelve Member States. The lowest annual rates were registered in Bulgaria and Croatia (both -1.1%) and Slovakia (-0.9%). The highest annual rates were recorded in Belgium (2.0%), Sweden (1.1%) and Malta (0.9%). Compared with June 2016, annual inflation fell in nine Member States, remained stable in seven and rose in twelve. 

Our goal is not to have an unemployment rate of zero, instead, it’s to be near the “natural rate” of unemployment: That’s the rate we can expect in a healthy economy. I see that number as about 5 percent, which means that with the unemployment rate at 4.9 percent, we’re right on target. The unemployment rate is obviously not the only measure of labor market health, but the multiple indicators tend to move together and are sending similar signals, with almost universal improvements across them all. Even the metric many people have been worried about, the labor force participation rate, is not the 21st century breakdown some people have feared; in fact, it’s back pretty close to what I see as normal. The participation rate takes the labor force and divides it by everyone in the United States over the age of 16, which covers a lot of people who aren’t working or looking for a job for perfectly normal reasons; overall, the low participation rate can be explained by demographic factors and longer-term trends, such as baby boomers retiring and young people staying longer in school.1

A Long-Term Chart of the LFPR

The Atlanta Feds Labor Market Spider Chart

Turning to the other side of the ledger, inflation is on course to meet our 2 percent goal. Although it’s been persistently below target over the past several years, recent data look more favorable. Over the past year, the strengthening of the dollar and falling energy prices have pushed inflation down, but these influences should fade over time. To cut through some of the noise, it’s useful to look at measures of inflation that strip out volatile prices and provide a clearer view of the underlying trend. Those measures suggest that underlying inflation is in the 1½ to 1¾ percent range. We’re not quite at our target, but the strength of the labor market should help us along.

Dallas Fed's CPI Analysis

Cleveland Fed's CPI Analysis

Thursday, August 18, 2016

Bonddad's Thursday Linkfest

After Hitting New Highs, SPYs Are Still Struggling

The Transports Haven't Confirmed Rally 

Major Insurers Leaving Health Insurance Marketplace (NYT)

One Year Chart of IHF (Health Care Providers) ETF

One Year Chart of XLV (Health Care) ETF

UK Unemployment Rate Drops to 4.9

Percent That Each Indicator is Off From Its High

Wednesday, August 17, 2016

Bonddad's Wednesday Linkfest

UK CPI + .6% Y/Y; PPI Up .3% Y/Y

Table of Contributions to UK CPI Increase

Table of Contributions to PPI Increases

The market-cap weighted yield on bonds included in the Bank of America Merrill Lynch US high-yield index is 6.54 per cent — the last time it was lower was in June of last year before the market was rocked by worries about the extent of defaults brought on by the end of the shale gas boom.

The euro equivalent stands at 3.52 per cent, close to its historical lows — the only time junk bonds yielded less was for just a few days in June 2014.

1-year Chart of the JNK ETF

JNK Relative to Other Bond ETFs

The most recent data on prices and labour costs confirmed that domestic cost pressures had been subdued. This reflected a number of factors associated with low wage growth and pressures on costs and margins, which had resulted in the lowest year-ended rate of non-tradables inflation since the late 1990s. Heightened retail competition in recent years, including from new foreign entrants, had limited increases in goods prices. Rent inflation had remained at low levels and members observed that this was likely to persist for some time given the large pipeline of new construction. In contrast, growth in prices of administered items and the cost of constructing new dwellings had increased in the June quarter. Meanwhile, the prices of tradable items (excluding volatile items and tobacco) had declined in the June quarter and were little changed over the year. Although the depreciation of the exchange rate over the past few years had exerted upward pressure on import prices, this had been largely offset by subdued domestic costs.

Members noted that there was little change in the forecast for underlying inflation. The central forecast was still for inflation to remain around 1½ per cent over 2016 before increasing to between 1½ and 2½ per cent by the end of the forecast period. The substantial depreciation of the exchange rate over recent years was expected to exert some upward pressure on inflation for a time and inflation expectations were assumed to return to longer-run average levels. The forecast increase in underlying inflation also reflected the expectation that strengthening labour market conditions would lead to a gradual rise in growth in labour costs. In particular, members noted that growth in average earnings had been low given the spare capacity in the labour market. Moreover, growth in average earnings had been affected by lower wage outcomes in sectors related to the mining industry as a part of the process of adjusting to the lower terms of trade and the end of the mining investment boom. Both of these effects were expected to wane over the forecast period. Members noted that there continued to be considerable uncertainty about momentum in the domestic labour market and the extent to which domestic inflationary pressures would rise over the next few years.

One Year Charts of Major S&P Sectors

US Industrial Production Up .7%

 1 Year Chart of the XLIs and XLUs

Tuesday, August 16, 2016

Sorry, Doomers, the shallow industrial recession ended in March

-by New Deal democrat

Today's industrial production and yesterday's Empire State manufacturing report stick a fork in any notion that the shallow industrial recession of 2015 hasn't ended.

This post is up at

Bonddad's Tuesday Linkfest

Brexit To Be Delayed Until 2019?

Britain's exit from the European Union could be delayed until at least late 2019 because the government was too "chaotic" to start the two-year process early next year, the Sunday Times reported, citing sources it said were briefed by ministers.

Britain voted to leave the EU on June 23, but views differ over when it should invoke "Article 50", which sets the clock ticking on a two-year deadline to leave the bloc, with some senior politicians calling for a quick departure.

Prime Minister Theresa May, who campaigned for Britain to remain in the EU and leads a cabinet of ministers from either side of the debate, has said she will not trigger Brexit talks this year as Britain needs time to prepare.

But British government ministers have warned senior figures in the City of London, London's financial district, that Article 50 was unlikely to be triggered early in 2017 because the situation in government was "chaotic", the Sunday Times reported on Sunday.

"Ministers are now thinking the [Article 50] trigger could be delayed until autumn 2017," one source, who had spoken to two senior ministers, told the newspaper

Japanese GDP Disappoints

A Look At the GDP Data From a Historical Perspective

Daily Chart of the EWJ ETF

Homebuilder Confidence Rises

After holding steady for the past four months, builder confidence in the market for newly constructed single-family homes rose two points in June to a level of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since January 2016.

“Builders in many markets across the nation are reporting higher traffic and more committed buyers at their job sites,” said NAHB Chairman Ed Brady, a home builder and developer from Bloomington, Ill. “However, our members are also relating ongoing concerns regarding the shortage of buildable lots and labor and noting pockets of softness in scattered markets.”

“Rising home sales, an improving economy and the fact that the HMI gauge measuring future sales expectations is running at an eight-month high are all positive factors indicating that the housing market should continue to move forward in the second half of 2016,” said NAHB Chief Economist Robert Dietz.

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Yearly Chart of the XHB

Financial Comparison of the 10 Largest (by market share) Homebuilder Companies

 RRG of EM ETFs from Stockcharts

Monday, August 15, 2016

Four measures of real wage growth: pace of growth is decelerating

 - by New Deal democrat

In the last several years, I have written a number of posts documenting the stagnation in average and median wages, for example here and here.  Several of the series were just updated for the first quarter, so now is a good time to take another look.

We have a variety of economic data series to track both average and median wages:
  • The most  commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
  • The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full time workers each quarter
  • The BLS also measures the Employment Cost Index quarterly.  
  • The BLS also measures "business sector real compensation per hour" quarterly. 

The good news is that, with underemployment under 10%, we are generally continuing to see improved real wage growth compared with earlier in this expansion.  The below graph tracks monthly average (mean, not median) hourly wages (blue), median wages from the employment cost index (red), real compensation per hour (brown), and median usual weekly earnings (green). All are adjusted for inflation.  Since the quarterly index of median wages only started in Q1 2001, I have normed the indexes to 100 at that time:

Real compensation per hour did decrease in Q2. Otherwise, all 3 other measures are at highs since the turn of the Millennium.

Here is a longer term view.  The ECI only started in 2001, but the other 3 go back in time at least into the 1960s:

With the exception of average hourly earnings (blue line), the other three are at or close to all time record highs. Real average hourly earnings, however, are still below their level for most of the 1970s.

Now let's look at the same information YoY.  This tells us about the rate of growth:

The rate of  YoY% growth peaked for all 4 series in the first half of 2015, and have shown decelerating growth since.  This shows us how dependent real wage growth has been on the price of gas, since that has been the primary determinant of consumer inflation over the past 15 years.

Gas prices are probably close to bottoming if they haven't already, which suggests that the rate of YoY wage growth has probably peaked for this cycle, even though with just under 10% underemployment, we have yet to reach full labor utilization.

Bonddad's Monday Linkfest

Global ETF Performance Relative to the SPYs For the Last 10 Weeks

US Industries Performance Relative to the SPYs for the Last 10 Weeks

Daily Chart of the XLVs

Valuation of the 10 Largest XLV Members (Finviz)

Daily Chart of the XLKs

Valuation of the 9 Largest  XLK Members