Saturday, November 26, 2016

Weekly Indicators for November 21 -25

 - by New Deal democrat

[N.B.: XE's blog is having a software glitch.  I am posting my Weekly column here until the issue is worked out.]

Monthly data for October was positive with the exception of new home sales, which declined. Durable goods orders increased. The advance reading of inventories showed a decline, which is good. Existing home sales set a new post-recession record high.  

My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available.  They are also an excellent way to "mark your beliefs to market."

In general I go in order of long leading indicators, then short leading indicators, then coincident indicators.

Interest rates and credit spreads
  • Dow Jones corporate bond index 358.16 up +0.12 w/w (2016 high is 395.36, 2016 low is 341.41)
  • 2.36% 10 year treasury bonds up +.02% (new 12 month high intraweek)
  • BofA/ML B Credit spread down -.22% to 4.70% (12 month low of 4.62% on Oct 22)
Yield curve, 10 year minus 2 year:
  • 1.24%, up +.32% w/w
30 year conventional mortgage rate
  • 4.19%, up +.07% w/w (52 week high)
Yields on treasuries and mortgage rates continued to spike to 12 month highs this week. They are now negatives. Corporate bonds are still neutral. Because rates made new lows after the Brexit vote in June, that nevertheless strongly suggests that the expansion will continue through mid-2017.  Yields are also still positive, but spreads are neutral.

Mortgage applications
  • purchase applications up +3% w/w
  • purchase applications up +11% YoY
  • refinance applications up +3% w/w

Real Estate loans
  • Down -0.1% w/w
  • Up +6.8% YoY
Mortgage applications briefly  spiked in response to low rates following the Brexit vote.  Purchase applications last made a new high at the beginning of June.  They have wobbled between being positive and neutral for the last 9 weeks. This week they turned higher. But withhold your cheers, because the same thing briefly happened in 2013 at the time of the "taper tantrum" as borrowers rushed to lock in rates before they got any higher.  Mortgage applications may go YoY negative within the next several weeks.  If so, they will flip to becoming an important negative. Refinance applications remain a mild positive for the moment.

Real estate loans have been firmly positive for over 3 years.

Money supply
  • +2.9% w/w
  • Unchanged m/m 
  • +8.0% YoY Real M1
  • _0.4% w/w    
  • +0.5% m/m 
  • +6.0% YoY Real M2 
Both real M1 and real M2 have been firmly positive almost all year, although less so in the last month. 

Trade weighted US$

  • Up +0.82 to 126.43 w/w, up +4.1% YoY (one week ago) (Broad)
  • Up +0.21 to 101.50 w/w, up +1.7% YoY (yesterday) (major currencies)
The US$ appreciated about 20% between mid-2014 and mid-2015.  It went mainly sideways since then until spiking higher after the US presidential election. It has been neutral for 7 of the last 8 weeks.

Commodiy prices
  • Up +2.13 to 98.06 w/w
  • Up +18.46 YoY
BBG Industrial metals ETF
  • 116.61 up +8.03 w/w, up +33.0% YoY
Commodity prices bottomed about one year ago.last November. Recently metals briefly turned negative, but have now resumed being positive, and surged higher in the last several weeks.
Stock prices S&P 500
  • Up +1.4% w/w (new record high)
Stock prices became a positive having made new all-time highs in summer, and made more new highs this week.

Regional Fed New Orders Indexes
(*indicates report this week)
  • Empire State up +8.7 to +3.1
  • Philly up +2.3 to +18.6
  • *Richmond up +19 to +7
  • Kansas City down -8 to +6
  • Dallas down -0.6 to -3.5
  • Month over month rolling average: up +4 to +6 (12 month high)
In the months since I started coverage of this metric, the regional average has been more negative than the ISM manufacturing index, but has accurately forecast its month over month direction. The average Fed readings are at their most positive this year as of now.

Employment metrics
 Initial jobless claims
  • 251,000 up +16,000
  • 4 week average 251,000 down -2,500
Initial claims remain well within the range of a normal economic expansion, as does the 4 week average. 

  • Down -1 to 98 w/w
  • Down -0.61 YoY
This index turned negative in May 2015, getting as bad as -4.30% late last autumn.  Since the beginning of the year it became progressively "less bad" and for the last few months has been so close to positive YoY as to be a neutral, as it was again this week.

Tax Withholding
  • $147.6 B for the first 16 days of November vs. $146.3 B one year ago, up +$1.3 B or +0.9%
  • $181.0 B for the last 20 reporting days ending Wednesday vs. $173.6 B one year ago, up +$7.4 B or +4.3%
Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, since August 2015.  The last few months have shown a marked improvement, although November has been poor so far.

  • Oil up +$0.39 to  $45.96 w/w,  down -$1.79 YoY
  • Gas prices down -$0.03 to $2.15 w/w, up +$0.06 YoY
  • Usage 4 week average up +0.6% YoY
The price of gas bottomed last winter at $1.69.  Usage had been almost uniformly positive until several weeks ago.  It turned negative briefly, but is weakly positive this week.  Gas prices are off their summer seasonal high, but have gone sideways for the last three months, and are now higher YoY, making them a neutral.  Oil prices have come down in the last month, so that has turned back to positive.  In general oil is no longer a tailwind for the economy, but it isn't a headwind either.

Bank lending rates
Both TED and LIBOR rose since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  Both recently reached that level. The TED spread has turned positive for the last three weeks.

Consumer spending
Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat over the last 12 months.  Redbook has recently turned very weak.  Goldman and Gallup have both been generally more positive, although Gallup was wobbly for a month before turning positive again. The results were a mixed positive this week.

Railroad transport
  • Carloads up +1.3% YoY
  • loads ex-coal up +1.1% YoY
  • Intermodal units up +4.4% YoY
  • Total loads up +2.8% YoY
Shipping transport
Rail traffic turned negative and then progressively worse in pulses throughout 2015. Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff all spring (typically down -10% or more) in spring.  It trended incrementally less awful since June, generally has scored neutral. For the last three weeks it has turned positive.
Harpex has recently resumed its decline again to repeated multi-year lows. BDI recently turned positive, then neutral, and is now screamingly positive again.  I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.
Steel production
  • Up +1.6% w/w
  • Up +7.1% YoY
Until spring 2014, steel production had generally been in a decelerating uptrend.  It then gradually rolled over and got progressively worse in pulses through the end of 2015. This year it started out as "less worse" and has been neutral to positive for the last few few months.


Yields continued to increase this week. As a result, the interest rate components of the long leading indicators are negative, except for corporate bonds, which are a neutral.  Purchase mortgage applications returned to being positive this week, but I am not expecting that to last. The yield curve and money supply as well as real estate loans remain positive.

Short leading indicators are positive with the exception of spreads, gas prices, and the US$, which are neutral.  Stock prices, jobless claims, industrial commodities, the regional Fed new orders indexes, and oil prices are all positive.

The coincident indicators have also become much more positive, including rail, the TED spread, the BDI, steel, are all positive now.  Tax withholding remains slightly positive, and consumer spending varies from strongly to just barely positive. Temp staffing is neutral.  Only the Harpex shipping index and LIBOR remain negative -- in fact, outside of some interest rates the only two negatives in the entire list of indicators.

In summary, positive readings predominate from long leading through short leading to coincident indicators. The present and the near future appear quite good. The big concern for the longer term is the continued increase in interest rates. If it persists, the weakness will feed through the rest of the economy over the next 18-24 months.

Have a nice weekend!
Sent from my iPad

Friday, November 25, 2016

Will newly confident GOP voters actually start spending more?

 - by New Deal democrat

I ran across the following graph at a Doomer website I occasionally check:  

So, are Happy Days Here Again because of Trump?
Well, first of all, the article noted that Gallup had found a profound difference in the changes in confidence between democrats and republicans:

Democrats' confidence declined by 15%, but GOP confidence soared by over 30%!
The real question is, does this translate into actual spending?
We have been here before.  Back in early 2013, I wrote that spending by affluent democrats may have been boosting the economy.  Here's what I said then: 
So the first thing I noticed is that the dividing line between upper income consumers and the rest is $90,000 annual income. David lives in southern California, so he may not be aware, but the only way somebody with a $90,000 income is getting into a home in the Hamptons is as a caterer or landscape contractor.
But the next thing that got my attention, being a total data nerd, is that big spike upward in the confidence of the lower 75% back in September 2012, that continued upward through November and seems to have had a lasting effect. So I did some searching of archived Gallup reports, and lo and behold, Gallup found a very specific reason for that spike:
Because the Gallup Economic Confidence Index is based on daily tracking of consumer attitudes, we can pinpoint the day that confidence increased. That day was Sept. 4, the first night of the Democratic National Convention. [NDD note: the night of Bill Clinton's keynote address] After averaging -27 in August, and registering -28 on Sept. 3, the Gallup Economic Confidence Index jumped to -18 on Sept. 4, and has mostly remained at or near that improved level.
Here's the graph from that time:

If you go back to the first graph above, you can see that 10% increase in late 2012 that I wrote about in 2013.  In fact, you can also see a transitory 20% spike when Obama was elected in 2008.

In 2013 the economic confidence of (especially affluent) democrats translated into actual spending, according to Gallup:

My suspicion is, the current spike will fade as did the one in November 2008.  But the bottom line is, it will actually be a positive if the newly confident GOP voters actually start spending more.

Wednesday, November 23, 2016

Dollar in Three Year Rally Versus the Yaun

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 

The chart above shows that the dollar rallied about 10% versus the yuan over the last 3 years.  There are two reasons for this move.  First, as U.S. economic activity started to increase, so did the possibility of the Federal Reserve increasing interest rates -- an event that is dollar positive.  Second, over the same period, the Chinese economy started to weaken (relatively speaking) which places downward pressure on the yuan.  

Where Will Employees Come From For Trump's Plans?

“I don’t think we should look at mining to be an engine for job growth,” said Thomas Costerg, senior U.S. economist at Standard Chartered Bank in New York. “You could see a pickup in employment. But on the scale of the U.S. labor market, which is really huge, if you compare what’s really driving job growth right now, which is mostly services,” the sectors affected by energy policy changes are “quite marginal.”

Several charts will flesh out the above statement:

The number of employment jobs relative to total payroll employment has consistently decreased over the last 70+ years, falling from 3% in the 1940s to less than half a percent today.  The same pattern emerges with manufacturing jobs:

Manufacturing jobs have fallen from about 30% of total U.S. employment right after WWII to a current level of just below 10%.  

The reality is that service sector provides most U.S. jobs:

Service jobs increased from about 50% in the 1960s to 70% today.  

Even if we see policies that aggressively promote manufacturing, the U.S. simply doesn't have a large enough pool of potential employees to staff those jobs in large enough quantities to make a meaningful difference in the above figures.  That would require an economy wide series of massive programs on par with a military mobilization.  I seriously doubt that any administration would undertake such a program, much less a Republican administration.

Bonddad's Wednesday Linkfest

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 

Existing Home Sales Up Slightly

Sales at the National Level

1-Year Chart of Regional Sales Levels

Understanding the recent weakness of productivity growth is central to addressing the longer-run challenges confronting the economy. Productivity growth over the past decade has been lackluster by post-World War II standards. Output per hour increased only 1-1/4 percent per year, on average, from 2006 to 2015, compared with its long-run average of 2-1/2 percent from 1949 to 2005. This halving of productivity growth, if it were to persist, would have wide-ranging consequences for living standards, wage growth, and economic policy more broadly. A number of explanations have been offered for the decline in productivity growth, including mismeasurement in the official statistics, depressed capital investment, and a falloff in business dynamism, with reality likely reflecting some combination of all of these factors and more.

We should also consider the possibility that weak demand has played a role in holding back productivity growth, although standard economic textbooks generally trace a path from productivity growth to demand rather than vice versa. Chair Yellen recently spoke on the influence of demand on aggregate supply.3 In her speech, she reviewed a body of literature that suggests that demand conditions can have persistent effects on supply.4 In most of the literature, these effects are thought to occur through hysteresis in labor markets. But there are likely also some channels through which low aggregate demand could affect productivity, perhaps by lowering research-and-development spending or decreasing the pace of firm formation and innovation. I believe that the relationship between productivity growth and the strength of aggregate demand is an area where further research is required.

Real Output per Person

Real Output Per Hour

Weekly Charts of Commodity ETFs Show Industrial Metals Are the Only Sector Stoking Inflation

Weekly Chart of Agricultural ETF

Weekly Chart of Industrial Metals ETF

Weekly Chart of Energy ETF

Tuesday, November 22, 2016

Real retail sales postive for the near future

 - by New Deal democrat

Real retail sales is one of the most useful series I track.  I have an updated look over at

Bonddad's Tuesday Linkfest

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 

Chicago Fed National Activity Index

Overall Index

1-Year of the Index's Components

Is the Bond Market Sell-Off Overdone?

The global bond market rout triggered by Donald Trump’s US election victory looks overdone, according to bond investors now betting that the sell-off was too violent and that borrowing costs will remain contained into the start of the new year.

Mr Trump is expected to unveil a large, inflation-fuelling economic stimulus package of infrastructure spending and tax cuts, which has stoked fears of an end to the three-decade bull market in bonds. The global fixed income market lost more than $1.8tn of value over the past two weeks, sending yields — which move inversely to prices — to a nine-month high on Friday.

But some big investors are betting that the bond turmoil has been excessive, and are dipping back into the market, especially in areas such as US corporate debt, which now offers more attractive returns.

1-Year Chart of the Treasury Market ETFs

1-Year Chart of the Vanguard Intermediate Bond ETF

1-Year Chart of the Vanguard Long-Term Corporate Bond ETF

Monday, November 21, 2016

Will early 2017 be Indian Summer for employment?

 - by New Deal democrat

I've been writing that the economy is in Indian Summer.  By that I mean, a spell of good economic data well after the mid-point of an expansion.  A variety of measures that tend to peak near the middle of the expansion did so at about year-end 2014.  We had a poor period early this year, but by Q3 the economic metrics had improved.

One such mid-cycle indicator that is particularly un-noisy is the YoY% change in employment:

As you can see it tends to be quite smooth, and tends to peak near the midpoint of economic expansions, except in those cases like the 1980s and 1990s when the Fed goes through 2 loosening and tightening cycles.

In this expansion YoY employment growth peaked at about 250,000 per month.  Recently employment gains have been averaging about 150,000 to 175,000 a month.  I suspect we may have a period of improvement over the next quarter or two, perhaps to over 200,000 per month.  Here's why.

First, while the relationship is noisy, real retail sales tend to lead employment.  Here is the YoY% change in real retail sales vs. employment for the last 25 years:

By no means is there even remotely a 1:1 relationship (see e.g. the late 1990s) but in general a waxing/waning in real consumer spending tends to lead to a waxing/waning of employment growth over the next 3-6 months.

We've had a little spurt in consumer spending in the last several months:

You can also see that upward jag in the YoY graph above.  So that suggests an increase in monthly employment growth in the next few periods.

Secondly, a much tighter leading relationship exists between initial jobless claims and the unemployment rate.  Here's the graph going back 50 years:

The leading relationship is pretty obvious.  Now here is a close-up of this economic expansion (you can disregard the green line for now): 

Again the relationship has been pretty consistent.

Now here is the same relationship expresses in YoY%s:

This is a remarkably tight correlation.  Once again, here is this economic expansion:

We can see that as the YoY change in jobless claims turned nearly flat beginning late last year, and the unemployment rate similarly stopped declining a few months later.  Since initial jobless claims have fallen to 40 year lows in the last few months, there's a very good chance that the unemployment rate will similarly decline, at least a little further. perhaps to the 4.6%-4.7% range.

Not only do several leading relationships suggest that monthly employment growth is likely to pick up a little, and the unemployment rate further decline, but that in turn suggests that we may see a little more wage growth, at least nominally.

Coming out of recessions, wage growth tends to decline until the underemployment rate U6 falls to roughly 10%. Once it goes below that number, wage growth tends to increase.  Here's what that looks like:

We're presently at 9.7% underemployment, and we've seen a noticeable if small increase in wage growth.  Since I'm expecting unemployment to decline at least a little more, that suggests that nominal wage growth will also pick up at least a little bit in the coming months.

All in all, there is a pretty good chance that the first half of 2017 will be Indian Summer for employment, with employment growth averaging over 200,000, a slight decline in the unemployment rate, and an increase in nominal wage growth.

Bonddad's Monday Linkfest

F. Hale Stewart is a financial adviser with Thompson Creek Wealth and a transactional attorney, specialising in asset protection and advanced tax planning. 

U.S. Indexes Performance Last Week

1-Year Chart of the IYTs

1-Year Chart of the IWMs

US Industry ETF Performance Last Week

1-Year Chart of the XLEs

1-Year Chart of the XLFs

Inflation Expectations are Rising, Leading to an Increase in Yields