Saturday, December 3, 2016

Weekly Indicators for November 28 - December 2 at

 - by New Deal democrat

My Weekly Indicators post is up at

While the present and near future forecast look sunny, the broad US$ joined interest rates as an important negative this week.

Friday, December 2, 2016

November jobs report: good unemployment news, faltering wage growth

- by New Deal democrat

  • +178,000 jobs added
  • U3 unemployment rate down -0.3% from 4.9% to 4.6%
  • U6 underemployment rate down -0.2% from 9.5% to 9.3%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now: down -36,000 from 5.912 million to 5.876 million  
  • Part time for economic reasons: down -220,000 from 5.889 million to 5.669 million
  • Employment/population ratio ages 25-54: down -0.1% from 78.2% to 78.1% 
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.02 from $21.71 to $21.73,  up +2.4% 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.)
September was revised upward by +17,000, but October was revised downward by -19,000, 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 mixed.
  • the average manufacturing workweek declined -0.2 from 40.9 to 40.7 hours.  This is one of the 10 components of the LEI, and is a negative.
  • construction jobs increased by +19,000 YoY construction jobs are up 155,000.  
  • manufacturing jobs decreased by -4,000, and are down -54,000 YoY
  • temporary jobs increased by +14,300, a new high.

  • the number of people unemployed for 5 weeks or less increased by +24,000 from 2,397,000 to 2,421,000.  The post-recession low was set 1 year 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.
  • Professional and business employment (generally higher- paying jobs) increased by +63,000 and are up +571,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.1  from  106.0 to 106.1 
  •  the index of aggregate payrolls was unchanged at 131.3 . 
Other news included:         
  • the alternate jobs number contained  in the more volatile household survey increased by  +160,000 jobs.  This represents an increase  of 2,641,000  jobs YoY vs. 2,253,000 in the establishment survey.    
  • Government jobs rose by +22,000.     
  • the overall employment  to  population ratio for all ages 16 and up was unchanged at  59.7%  m/m and is up +0.3% Y oY.   
  • The  labor force participation rate fell -0.1% from 62. 8% to 62.7% and is up +0.2% YoY (remember, this includes droves of retiring Bsoomers).     

This was a good headline report with mixed internals. The good news was mainly in the underemployment and underemployment rates, which both fell to new lows, as did the number of those part time for economic reasons. That temporary employment is making new highs is also a good leading indicator for the rest of the jobs market.

The bad news primarily came in faltering wage growth, which fell to +2.4% YoY, and aggregate real wages, which also fell.

Again, a good late cycle "Indian Summer" employment report, but one that if anything amplifies my concern that in the next recession we will see actual wage deflation for the first time in 80 years.

The Potential For Very Bad Inadvertent Policy Impacts of Trump's Trade Policies

     This week, president-elect Trump directly intervened in the private economy.  He negotiated directly with the Carrier Corporation, getting them to agree to keep an Indiana factory in the U.S..  He has also said that renegotiating NAFTA is a top priority, along with increasing export and import tariffs to prevent U.S. companies from moving abroad.

     Above is a chart showing that real exports as a percent of GDP are now greater than 12% of real U.S. GDP.  While we don't know the exact parameters of Trump's policies, we do know that the law of unintended consequences tells us that for every policy action, there may be a large number of inadvertent policy results.  Trump's policies have the potential to seriously unbalance 12% of the U.S. economy, which may negatively ripple through other economic sectors.  

Thursday, December 1, 2016

Is A Housing Slowdown in the Cards?

The chart above plots three sets of data: the 10 year CMT treasury (in blue), the 15-year mortgage rate (in red) and new home sales (in green).

Note that as the blue and red line declined from the beginning of 2014 new home sales rose.  This is an easily explained relationship: lower interest rates lead to lower financing costs, increasing overall housing demand.  But interest rates have sharply increased since the election.  Just as low rates stimulate demand, expect higher rates to lower it.


Bonddad's Thursday Linkfest

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

Fed Releases the Beige Book

Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from early October through mid-November. Activity in the Boston, Minneapolis, and San Francisco Districts grew at a moderate pace, while Atlanta, Chicago, St. Louis, and Dallas cited modest growth. Philadelphia, Cleveland, and Kansas City cited a slight pace of growth. Richmond characterized economic activity as mixed, and New York said activity has remained flat since the last report. Outlooks were mainly positive, with six Districts expecting moderate growth.

Demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few Districts. Modest to moderate increases in capital investment are expected in several other Districts. Business service firms saw rising activity, especially for high-tech and information technology services. Reports from ground freight carriers were mixed, while port cargo increased. A majority of Districts reported higher retail sales, especially for apparel and furniture. New motor vehicle sales declined in most Districts, with a few Districts noting a shift in demand toward used vehicles. Tourism was mostly positive relative to year-ago levels. Residential real estate activity improved across most Districts. Single-family construction starts were higher in a majority of Districts, while multifamily construction reports were mixed. Activity in nonresidential real estate expanded in many Districts. Banking conditions were largely stable, with some improvement seen in loan demand. Farmers across reporting Districts were generally satisfied with this year's harvests. However, low commodity prices continue to weigh on farm income. Investment in oil and gas drilling increased slightly, while reports on coal production were mixed. A tightening in labor market conditions was reported by seven Districts, with modest employment growth on balance. Districts noted slight upward pressure on overall prices.

Personal income increased $98.6 billion (0.6 percent) in October according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $86.5 billion (0.6 percent) and personal consumption expenditures (PCE) increased $38.1 billion (0.3 percent).

Real DPI increased 0.4 percent in October and Real PCE increased 0.1 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.

Wednesday, November 30, 2016

The corporate profit recession has ended ... (but) ...

 - by New Deal democrat

The important long leading indicator of corporate profits was reported yesterday for the 3rd Quarter.

The good news is, corporate profits increased significantly, whether measured nominally or adjusted by unit labor costs (the adjustment preferred by Prof. Geoffrey Moore who identified corporate profits as a long leading indicator:

The bad news is also evident from the graph.  Regardless of which way you measure, corporate profits are still below their peak from several years ago.  In particular, adjusted by unit labor costs, corporate profits are still 9% less than they were at their peak in 2012.

So, the profits recession has bottomed -- as of Q4 of last year.  But before you get too excited about the end of the profits recession, consider that industrial production isn't exactly setting the world on fire:

And because profits are below their peak for this expansion, they are one indicator which has still given the necessary signal to be consistent with an oncoming recession.

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. 

Brad Delong With a Really Important Insight

While standard measures show productivity growth falling, all other indicators suggest that true productivity growth is leaping ahead, owing to synergies between market goods and services and emerging information and communication technologies. But when countries with low-growth economies do not sufficiently educate their populations, nearly everyone below the top income quintile misses out on the gains from measured economic growth, while still benefiting from new technologies that can improve their lives and wellbeing.

Exports Jumped Thanks to a Large Increase in Consumer Durable Good Exports

Corporate Profits -- One of the Primary Leading Indicators -- Increased for A Second Consecutive Quarter

Consumers Continue to Buy a Lot of Durable Goods; They Bought a Lot of Cars Last Quarter

Tuesday, November 29, 2016

The US is A Service Economy and Has Been for A Very Long Time

President-elect Trump has promised he'll bring back high-paying manufacturing jobs.  Unfortunately, macroeconomic forces disagree with him.

The above chart places total service sector and goods-producing jobs on a logarithmic scale.  You'll notice that total manufacturing jobs plateaued in the late 1970s.  Meanwhile, total service jobs have consistently increased since the beginning of the 1960s.

The above chart plots total monthly increases of service sector (red) and goods producing (blue) jobs. For the last four expansions, the service sector has consistently created far more jobs than the goods producing sector.

The US is a service economy.  Period.  

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. 

For both the euro area and the United Kingdom, the Single Market has been a fundamental asset and a positive sum game. Bringing together European economies has allowed the European Union to reap efficiency gains and better satisfy demand. For sectors such as financial services, the ability to serve an EU-wide, interconnected market is a key factor of success. The Single Market also makes it possible for firms to benefit from the complementarities of various locations across the EU as part of European value chains. Moreover, the free movement of people ensures that anyone can seek work where economic activity is concentrated as a result of agglomeration effects. Economic clusters in turn benefit from being able to recruit workers from across the EU.

The United Kingdom has benefited from the strong economic and financial links within the Single Market. In fact, more than 40% of the foreign value-added contained in UK exports comes from the rest of the EU. Within the Single Market, the United Kingdom has also been a major hub for wholesale banking activities. More specifically, the single passport means that UK-based banks can currently serve the rest of the EU without needing to set up subsidiaries in other Member States, and vice versa. That implies sizeable savings in terms of capital and liquidity.

If, in the long run, the risk of a less open UK economy in terms of trade, migration and foreign direct investment were to materialise, there would be a negative impact on innovation and competition and, thus, productivity and potential output. Such developments would first and foremost weigh on the UK economy. They would to a likely lesser extent also have some limited adverse spillover effects on the euro area. The overall impact would, however, vary across countries depending on their trade links with the United Kingdom.

The US risks harming its own interests in any renegotiation of the North American Free Trade Agreement, as planned by Donald Trump, José Antonio Meade, Mexico’s finance minister, has warned.

“The damage assessment is not just Mexico’s,” he told the Financial Times during a recent visit to London. He added that the trade deal, which includes Canada as well as the US and Mexico, “is creating value on both sides of the border”.

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president-elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.


The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Monday, November 28, 2016

US Bond Market Week in Review

      Last week’s column focused exclusively on Chairperson Yellen’s most recent Congressional testimony where she convincingly argued for a rate hike in the near future.  Markets interpreted this to mean at the December meeting.  In this week’s column, I will look at the 4 primary coincidental indicators along with a broad selection of labor market and price indicators to demonstrate that the data supports a rate hike in the next few months.

    Let’s start with the four primary coincidental indicators:

Only industrial production is declining; the other three have been consistently increasing since the end of the recession.  The decline in industrial production is contained to the mining sector; utility and manufacturing output has been moving sideways for the last several years, indicating the oil sector slowdown hasn’t bleed into other areas.

     Turning to the labor market, the Atlanta Fed’s Spider Chart shows a variety of indicators in a convenient format:

The chart above plots 15 different employment indicators covering 6 different labor market data categories at three different times: the height of the last expansion (dark blue), the depth of the recession (light green) and current levels (gold).  Clearly, current conditions are far better than the depths of the last recession.  Confidence, employer behavior and flows are as high as or just below previous highs.  But recent utilization and wage levels are below the heights of the previous expansion.  It’s more likely that weak utilization rates are causing weak wage growth.  This, oddly enough, helps the fed because weaker wages lowers inflationary pressure.  But weakness in these two areas aren’t sufficient to prevent a rate hike.

       And finally, we have prices:

The top chart shows the Y/Y percentage change is the CPI index while the bottom chart shows the Y/Y percentage change in the PCE price index.  In both cases, the core rate is at or near 2% while the overall rate is approaching 2%.  Both data sets support a rate hike.

     The above data, in combination with the recent rise in inflation expectations, all point to rate hikes in the future.

International Economic Week in Review

      Earlier in the week, Mario Draghi gave a speech where he noted three positive trends within the EU economy.  First, the banking sector was far stronger now than immediately after the recession.  Tier 1 capital increased from 7%-14% and lending to business was up.  Second, domestic demand growth now accounted for 1% of overall GDP growth.  This is in contrast to export demand, which contributed little to growth in the last 12 months.  Finally, the unemployment rate has dropped from 12% to 10%.  While this seems high by western standards, it does indicate the EU economy is making progress.  In other EU news, Markit released their latest flash estimate for the EUs manufacturing, service and composite indicators.  The service reading was 54.1, an 11 month high.  Manufacturing was also 54.1 as was the overall composite reading.  It appears that the ECBs bond buying program has been successful.

     Earlier in the week, newly appointed BOJ member Masai gave a speech that highlighted various risks to the international economic order:

The election of Donald Trump as U.S. President, Brexit, and the weak state of the European Union's financial sector have been named by Bank of Japan board member Takako Masai as possible causes of future global economic weakness and wild financial market swings.

Since Trump’s election, equities have rallied and global bonds have sold off.  The drop in bonds was so severe that the BOJ used its yield curve control program to halt the sell-off.  While some have argued the bond sell-off is overdone, there is no denying that the reflation trade now dominates global investment thinking, indicating that Masai’s concerns are well justified.  Other news showed a weak economy.  Exports declined 10.3% Y/Y while the Markit manufacturing flash estimate was 51.1, a number that, while positive, is statistically weak.

     The UK’s ONS released their second estimate of 3Q GDP, which was unchanged from the first report of a 2.3% Y/Y increase.  Services were the sole source of growth, rising .8% Q/Q.   Production, in contrast, decreased .5% as 3 of 4 subsectors decreased.  The UK’s Brexit quandary deepened.  Some governmental factions continued to push for a complete withdrawal while an increasing number of business leaders began advocating for a “soft Brexit,” which would comprise a multi-state withdrawal lasting over 2 years.  This would allow additional time for businesses to more gradually change their policies and structures, preventing severe economic disruption. 

     The RBA’s Christopher Kent gave a speech that not only contained a clear explanation of the current state of Australia’s economy, it also included an assessment of the economic conditions at the state level.  Kent described the macro level economy in the following terms:

The economy continues to adjust to the end of the resources boom (Graph 1). Our expectation is that GDP growth will be close to potential growth over the next few quarters and pick up to be a little above potential thereafter. The unemployment rate, which has declined over the past year by more than expected, is likely to edge just a little lower over the next two years. That implies that there will be some spare capacity in the labour market for a time. Inflation is low. In year-ended terms, we expect underlying inflation to remain around 1½ per cent for a few quarters before gradually increasing to more normal levels. That profile follows from the forecast for the growth of labour costs to rise gradually and is consistent with the medium-term inflation target.

Kent’s analysis also contained a positive assessment of the overall terms of trade:

One notable aspect of our latest forecasts was the upward revision to the outlook for Australia's terms of trade. Prices of bulk commodities have risen this year and contributed to a rise in the terms of trade of about 6 per cent in the June and September quarters. That's the first rise in the terms of trade in some time. Our forecasts are for the terms of trade to remain above the low point reached earlier this year (and about 25 per cent above the average of the early 2000s before the boom). While our forecasts are uncertain and subject to various risks, the upward revision represents a marked change from the pattern of the past five years. Our assessment, based in part on liaison information, is that the improved outlook for commodity prices is not likely to lead to a noticeable pick-up in mining investment (in the near term at least). Even so, if our forecasts are right, the terms of trade will shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand

The biggest reason for better terms of trade (the difference in price between exports and imports) is the rise in industrial metals prices, which is captured by the daily DBB ETF chart:

US Economic Week in Review

     On Monday, the Chicago Fed released its latest National Activity Index.  This statistic collates 85 indicators from  four general economic statistical categories.  Any reading below .7 indicates a recession is a higher probability while any reading below 0 indicates the economy is growing below potential.  According to the indicator’s three-month moving average, the economy has been expanding below potential for the most of the last 5 years:

     Housing news was positive.  Existing home sales increased 2% M/M and 5.9% Y/Y.  Although new home sales decreased 1.9% M/M they increased a very strong 17.9% Y/Y.  The 5-year chart places new home sales figures into a longer-term perspective:

Starting in July 2015, new home sales began a year-long increase.  Recent declines probably a cooling off from an accelerating pace.  Going forward, expect both of these numbers to decrease as the impact of higher interest rates flows through the economy.

     Durable goods orders rose for the 4th consecutive month, this time by 4.8%; the figure rose 1% ex-transportation.  However, the overall trend is still weak:

The total orders line (in red) has moved sideways 2013 while the ex-transport number has decreased slightly over the last 2 years. 

    Economic conclusion: this week’s news was positive.  Housing continues to be a bright spot, although the recent increase in rates may slow their recent moves.  Durable goods numbers were also positive, although we don’t have enough data to determine if a new trend is starting.  Finally, the CFNAI is still within expansionary parameters, although the 3 month moving average is still showing a below average expansion. 

Doomer radio silence: trucking edition

 - by New Deal democrat

One of the hallmarks of Doomers is that a data series is only worth reporting if it shows that we are DOOOMED.  When it turns positive, it is no longer worth mentioning.

Such is the case now with the Cass Freight Index, a monthly trucking report.  It turned down badly early in 2015, and remained negative YoY since then, although it had gotten "less worse" in the past few months.

If this sounds familiar, it is because the weekly railroad loading report from the AAR has had the same trajectory. Basically the Cass Freight Index is useful as confirmatory of the much more timely AAR reports, but the AAR reports are much more timely, since they are reported weekly with less than a 7 day lag, which the Cass index is reported once a month somewhere in the middle to latter part of the ensuing month.

Since the weekly AAR reports had been tracking neutral to positive over the last month, I was waiting to see if the Cass Trucking report would confirm them -- and what the Doomer reaction would be.

Well, the wait is over, because here is the latest Cass Freight Index graph:

And the Doomer reaction -- radio silence.

The "shallow industrial recession" of 2015 is long gone, and the YoY measures are finally turning positive.  This is a good time to remind you of one of my consistent themes: that YoY data will lag turning points. My rule of thumb is that unadjusted YoY series have probably made a top or bottom when the YoY change is reduced to less than 1/2 of what it was at its maximum.

Meanwhile the Doomers will move on to the next metric which at the moment shows that we are DOOOMED!

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. 

Weekly Performance of US Indexes

The Russell 2000 is still outperforming 

The Mid-Caps Are Also Performing Well

US Sector ETF Performance

The potential for increased infrastructure spending is supporting a basic materials rally

Infrastructure spending is also supporting the XLIs

Potential deregulation of the energy sector is supporting the XLEs