Saturday, November 19, 2016

Weekly Indicators for November 14 - 18 at

 - by New Deal democrat

My Weekly Indicator post is up at

While Indian Summer has arrived for the coincident indicators, it should not come as a surprise that the big news is what has happened to the interest rate componsent of the long leading indicators.

Friday, November 18, 2016

If you have to look at just one thing . . .

 - by New Deal democrat

I'm already seeing a little chatter on political sites about whether or not there will be a recessison before the midterms.

The picture as to 2017 is coming into sharper focus, and at least through Q3, the short story is probably "Indian Summer" -- the forward-looking data looks pretty positive for the next 3 quarters.

After that, if you need to look at just one thing, then focus on interest rates.  Here is the 10 year Treasury bond as of this morning:

We made a new low in interest rates this July, due to a "flight to safety" after the Brexit vote.  Those low rates are feeding through into housing now, and that in turn will feed through into things like spending and production next year.

But probably due to the election, we've had a signficant increase in interest rates. During trading this morning, we tied the 12 month high of 3.34%.  Depending on how high interest rates back up, and how long they stay that way, we could see a sharp slowdown or even a downturn thereafter, for the same reasons that the post-Brexit lows will help the economy in the near future.

So if you don't want to follow an array of indicators, and you are interested in what the economy will look like going into the 2018 midterms, then focus on interest rates.

Thursday, November 17, 2016

How Brexit just ignited the US housing market

 - by New Deal democrat

As I've updated in the "long leading indicator" post below, as of this morning the housing data just turned unambiguously positive.  Give thanks to the UK voters who supported Brexi back in June!

This post is up at

Wednesday, November 16, 2016

The long leading indicators: on the cusp of turning negative? UPDATED with new housing information

 - by New Deal democrat

A "long leading indicator" is an economic metric that reliably turns a year or more before the onset of a recession.

Geoffrey Moore, who for decades published the Index of Leading Indicators, and in 1993 wrote  Leading Economic Indicators: New Approaches and Forecasting Records identified 4:
  • housing permits and starts
  • corporate bond yields
  • real money supply
  • corporate profits
A variation of the above is Paul Kasriel's "foolproof recession indicator," which combines real money supply with the yield curve, i.e., the difference in the interest rate between short and long term  treasury bonds. This turns negative a year or more before the next recession about half of the time. 
Another long leading indicator has been described by UCLA Prof. Edward E. Leamer who has written that "Housing IS the Business Cycle."  In that article he identified real residential investments as a share of GDP as an indicator that typically turns at least 5 quarters before the onset of a recession

Several other series appear to have merit as long leading indicators as well.
Real retail sales in several forms also has value as a long leading indicator.  Doug Short has identified real retail sales per capita as another important metric.  In a similar vein, Steven Hansen of Econintersect has flagged retail employment vs. real retail sales as turning significantly in advance of recessions. 

It also appears that the Fed' Labor Market Conditions Index also turns negative serves as a long leading indicator, typically turning negative at least one year before the onset of a recession.

Finally, the tightening of credit conditions also appears to have merit as a long leading indicator.  Two measures, the Senior Loan Officer Survey, and the TED spread, are worth noting.

That gives us a total of 9 varieties of long leading indicators.  All of these economic series have a long term history of turning a year or more before a recession.  

I haven't examined these in detail since the beginning of July.  Then, I found them just slightly positive on balance.  In light of recent interest rate moves, now is a good time for an update. 


With the sole exception of the 1981 "double-dip," corporate bond yields have always made their most recent low over 1 year before the onset of the next recession.  Following Brexit, in the beginning of July  BAA corporate bonds yields made a new all-time low, and AAA bonds tied their all time low. Treasuries yields  also made new lows, but interestingly, mortgage rates did not. While that was a big positive, in the last week interest rates have moved near one year highs, as shown by the Bloomberg corporate bond index:

Treasuries also made new lows at the beginning of July, while significantly, mortgage rates didn't:

On net, interest yields on bonds are still a positive, based on the new July lows.  But a further increase of about 0.20% in yields to a 12 month high would be enough to make them a negative going forward.


This is a complicated and changing  picture.  On the one hand, new single family home sales made a new post-recession high 2 months ago::

Like starts, single family permits have also been going sideways for a year, although they did eake out a new high, by 1,000, as just  revised for September UPDATE: They made yet another new high in October, as did starts:

UPDATE [Nov. 17]. Housing starts and permits for October were released this morning, and showed that both housig starts and single family permits made new post-rrecession highs. 
And mortgage applications have not made a new high since June, and are on the verge of turning negative YoY (h/t Calculated  Risk).

A major negative is that housing as a share of GDP has also declined in the last two quarters. 

As a result, housing cannot reliably be scored a positive beyond Q2 of next year.  UPDATE: Octobr's starts and permits data gives added confidence that housing is a positive through Q3 of next year.


The picture is mixed here a well.  Corporate profits last made a new high over a year ago, but it looks like the May have bottomed in Q4 of last year:

This cannot reliably be scored as either positive or negative.


No recession has ever started without at least real M1 or real M2, minus 2.5%, turning negative. Both have remained relentlessly positive.


This is an excellent long range forecasting tool in times of inflation.  Typically a recession begins after the Fed raises rates to combat inflation, sufficiently so that the yield curve inverts.  Much was made of its recent tightening, which nevertheless was very positive, and recently has reversed anyway:

 The yield curve remains as positive even now, with the same slope as it had in the middle of the 1970s, 80s, and 90s expansioins.  The 5 year spread is even wider than it was during most of the 1960s. 

I do want to caution that  the yield curve did not invert during the deflationary 1930s and low-flation 1940s, and several recessions happened anyway, so while I am including it, I suspect this is the long leading indicator most likely to signal falsely before the next recession.


In addition to money supply and interest rates, the loosening or tightening of credit appears to be an important component of changes in the economy over one year out.  Although it does not have a lengthy track record, the Senior Loan Officer Survey looks promising, as does whether or not the TED spread is in excess of 0.5% (inverted in the graph below):

Both of these are negative, the former for a year, and the latter for the last 3 months.


These peaked more than a year before the onset of the last two recessions.  Here's what they look like throough September:

On the other hand, retail hiring has outpaced real retail sales for about a year, a negative:

So these are giving a mixed signal as well.


This is a recently compiled indedx of 19 indicators from the Fed.  This too typically turns negative at least one year before the onset of a recession:

It has been negative for most of this year, although in the most recent report, it turned up.  On balance, this remains a negative.

So, to summarize: 
  • There is only two outright negatives: the labor maket conditions index, and credit conditions.
  • Positives include corporate bond yields, real money supply, and the yield curve, and 2 of 3 real retail sales measures, although corporate bond yields are not far from turning negative.
  • Several series -- housing and corporate profits -- are too mixed to be scored either positive or negative. UPDATE: with October's data, housing can still be scored a positive.
Enough of these metrics have made recent peaks that, for the next several quarters, growth should continue.  Beyond next summer, however, the picture is simply too mixed to make a call.  Much depends on whether the recent spike in interest rates continues, and causes the housing market to roll over, or whether last summer's post-Brexit lows in interest rates finally show up unambiguously in new post-recession highs in housing construction. UPDATE: they just did!   So it is not out of the question that I could turn negative on Q4 of next year depending on data between now and the end of the year.  UPDATE: I will still withhold judgemnt on Q4 of 2017, but Q3 now looks positive. 

Monday, November 14, 2016

Wholesale sales stall again, while inventories continue to decline slowly

 - by New Deal democrat

The shallow industrial recession caused largely by the surge in the US$ was a buildup in inventories compared with sales.  It looks like industrial production bottomed in March, and corporate earnings for Q3 look like they will turn positive YoY.  So how are inventories and sales doing?

One of the five graphs I have paid particular attention to is that of wholesalers' inventories and sales, since they have not had the secular issues that manufacturers, with "just in time" inventories, have had.

The current level of the inventory to sales ratio has sometimes but not always indicated a recession.

We can get a btter look by decomposing this ratio into its two components:  sales (blue) vs. inventories (red), expressed in real, inflation-adjusted terms.  H
istorically sales have made a  peak/trough first, and inventories catch up with a lag.  So this year I have been watching for two things: (1) a downturn in inventories, indicating the liquidation is underway; and (2) a bottoming of sales, indicating the inventory correction is over.

Here's what it looks like through September:

Sales bottomed in January and Inventories peaked at the same time.  

Now here is a close-up of the last year:

Inventories have continued to decline, but in real terms sales have stalled again.  Since sales lead inventories, this is not good news, and of course bears further watching.

Sunday, November 13, 2016

Understanding American society: a few important bookmarks for a post-election Sunday

 - by New Deal democrat

I wanted to bookmark a few facts that seem very important to understand American society in November 2016.

I. Econometric election models accurately forecast  a very close election:

2. The working class blames Washington over Wall Street for their woes by a 2:1 margin:

3. In 2016 apathy won.  Voters will not turn out for candidates they don't like:

4..  Democrats won the popular vote for President and for the Senate, but lost it as to the House:
In results that are still preliminary, 45.2 million Americans cast a vote for a Democratic Senate candidate, while 39.3 million Americans voted for a Republican. (In the White House race, as of Thursday afternoon, Clinton had 60.1 million votes and Trump had 59.8 million.)
.... Republicans captured the majority of the "popular vote" for the House on Election Day, collecting about 56.3 million votes while Democrats got about 53.2 million, according to USA TODAY calculations.
5.  The Herrenvolk GOP coalition is a virtual replica of the pre-Civil War Jacksonian democrat coalition, as described in the biography "American Lion":

6.  The actual leadership in power in the Democratic Party is cluelessly pro-Wall Street:
Ari Shapiro spoke with Rep. Xavier Becerra, a California Democrat, and with Tamara Draut from Demos, the progressive advocacy group. Shapiro asked whether the Democratic Party was too close to Wall Street. He had to push Becerra to answer the question as Becerra hedged. The chairman of the House Democratic Caucus spent his opportunity on air not talking about helping the little guys, but bent over backwards to defend the financial sector and address its concerns:
TAMARA DRAUT: We need to shed any remnant of a more Wall-Street-friendly approach to the economy. ....
XAVIER BECERRA: If you can name me a society and a particular civilization that hasn't had someone who's helped finance the building and construction of that civilization, then I'm willing to look at it.
[The proper response to that was, "The New Deal, asshole.  Look it up!"]

A little post-election Doomer fail diversion

 - by New Deal democrat

I seemed to remember that one of the usual Doomers had made an election year prediction, so I did a little rummaging around.  Here it is, from February 20, 2014: