Saturday, March 11, 2017

Weekly Indicators for March 6 - 10 at

 - by New Deal democrat

My Weekly Indicators post is up at

Unsurprisingly, in addition to the employment report, the big news this week was the jump in long term interest rates.

Friday, March 10, 2017

February jobs report: hitting on all cylinders but wages

- by New Deal democrat

  • +236,000 jobs added
  • U3 unemployment rate down -0.1% from 4.8% to 4.7%
  • U6 underemployment rate down -0.2% from 9.4% to 9.2%
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 -142,000 from 5.739 million to 5.597 million   
  • Part time for economic reasons: down -136,000 from 5.840 million to 5.704 million
  • Employment/population ratio ages 25-54: up +0.1% from 78.2% to 78.3%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 from $21.82 to $21.86,  up +2.5% 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.)
December was revised downward by -2,000, and January was revised upward by +11,000, for a net change of +9,000. 

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mainly positive.
  • the average manufacturing workweek was unchanged at 40.8 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +58,000. YoY construction jobs are up +219,000.  
  • manufacturing jobs increased by +28,000, and after being down YoY for a year, have now turned the corner again and are up +7,000 YoY
  • temporary jobs increased by +3,100.

  • the number of people unemployed for 5 weeks or less increased by +98,000 from 2,468,000 to 2,566,000.  The post-recession low was set over 1 year ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime rose +0.1 from 3.2 to 3.3 hours.
  • Professional and business employment (generally higher- paying jobs) increased by +37,000 and are up +597,000 YoY, an acceleration over the last year's pace.

  • the index of aggregate hours worked in the economy rose by 0.2 from  106.4 to 106.6 
  •  the index of aggregate payrolls -rose by 0.6 from 132.4 to 133.0. 
Other news included:         
  • the alternate jobs number contained  in the more volatile household survey increased by  +447,000 jobs.  This represents an increase  of 1,485,000  jobs YoY vs. 2,,349,000 in the establishment survey.    
  • Government jobs rose by +8,000.     
  • the overall employment  to  population ratio  for all ages 16 and up rose from  59.9%  to 60.0 m/m  and is up +0.2% YoY.    
  • The  labor force participation  rate rose  from 62.9% to 63.0%  and is up +0.1%  YoY (remember, this includes droves of retiring Bsoomers).     

This was a very good report in almost all respects, including the end of the manufacturing jobs recession, and a slight acceleration in better-paying professional and business jobs.

The few warts included the fact that none of the broader measures of labor market slack made new lows (although they did decline), and short term unemployment - a leading indicator - has not made a new low in 15 months.

But most of all, aside from some continued slack, the big shortfall in the economy as experienced by most Americans is the seemingly unending paltry wage growth.  Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.  Nearly 8 years into an expansion, this ought to be totally unacceptable, and should be ringing alarm bells about what might happen to wages when the next recession inevitably hits.

Wednesday, March 8, 2017

A quick primer on interest rates and rate hikes

 - by New Deal democrat

With increasing speculation that the Fed will again raise interest rates this month, I thought I would take a look at how long term rates, and the yield curve, react.

As most everybody who follows this stuff knows, in the last 60 years the yield curve has always inverted before the onset of a recession -- which presumably means that it narrows before it inverts.

But *how* does it narrow?  Do long term interest rates come down, do short term rates go up, or is there some of each?

Let's go to the graphs. Below are the yields on 10 year treasuries (blue), the Fed funds rate (green), and YoY consumer inflation (red), first from 1962 to 1983:

and from 1983 to the present:

There are a few trends that have remained true during both the earlier, inflationary era, and the more recent disinflationary and deflationary era.

First, all three generally move in the same direction, i.e., both long and short term interest rates tend to broadly correlate with the inflation rate.

Second, in terms of volatility:
 - long term interest rates are least volatile
 - the YoY inflation rate is next
 - the Fed funds rate is the most volatile.

Finally, in each case over the last 60 years, before a recession the yield curve has inverted because the Fed funds rate rose to and overtook long term rates. In the inflationary era, both continued to rise into the recession. In the more recent era, long term rates have been flat or declined slightly once there was an inversion.

Contrarily, the few times that long term rates declined to the level of the Fed funds rate (1986, 1994, 1998) it did *not* signal a recession, but rather a correction in a strong economy.

So let's take a look at the last 12 months:

Since the end of June, long term rates have actually risen more than short term rates, and have risen to over 2.5% again this week.  This is the sign of a relatively strong economy, at least over the shorter term 6 - 12 months.  Short rates have a long ways to go before they overtake long term rates.  Of course, if long term rates rise high enough, that will act to choke off the housing market and will set up longer term weakness.  But we're not there yet.

Tuesday, March 7, 2017

Why the economy looks good for the next 3 - 9 months

 -by New Deal democrat

I take an extended look at the short leading indicators over at

Sunday, March 5, 2017

International Economic Week in Review: Good News Abounds

   This week’s news continued in a positive trend.  All signs from the EU point to an uptick in overall activity.  Canada continues to grow modestly but is still dealing with negative business investment.  Japanese inflation was positive this month – a very welcome development for a country trying to undo decades of deflation.  And finally, the UK continues to confound those (myself included) who predicted a post-Brexit recession.

   EU news continued its positive trend.  Most important were the Markit numbers: the composite reading was 56, a 70-month high.  The service sector was also near a 5-year high with a 55.5 reading.  New orders and business activity increased, as did employment.  Rising prices were the only negative.  The manufacturing number rose .2 to 55.4; both production and new orders were higher.  But like the service report, prices were a problem, with some commodities described as “sellers markets.  Unemployment was steady at 9.6%; loan growth and money both increased.  Thanks to a 9.2% increase in energy prices, CPI rose 2% Y/Y.  And while retail sales declined .1% M/M, they increased 1.2% Y/Y, which continues this data series near 4-year continuous increase:

EU news turned the corner in 4Q16; nothing since has cast any aspersions on that change in direction and magnitude.

     The Bank of Canada maintained rates at .5%.  Their announcement offered this following brief summation of the Canadian economy:

In Canada, recent consumption and housing indicators suggest growth in the fourth quarter of 2016 may have been slightly stronger than expected. However, exports continue to face the ongoing competitiveness challenges described in the January MPR. The Canadian dollar and bond yields remain near levels observed at that time. While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States.

This week’s released of 4Q Canadian GDP supports this view.  While household spending rose .6%, business investment contracted again, this time by 2.1%.  Non-residential structure spending was off 5.9% while intellectual property investment declined 1.9%.  The 9-quarter contraction in business investment indicates that business sentiment is still muted.  On the plus, the Canadian dollars near five year low relative to the US dollar should help to spur exports in the coming quarters:

     News from Japan was positive.  Most important was the .4% Y/Y increase in CPI.  For a country that has not only suffered from deflation for decades but is also throwing the kitchen sink at the economy to solve the problem, this was welcome news.  While industrial production was off .8%, this was the first decrease in 6 months:

And the 35-month high in the Markit manufacturing number (it rose from 52.7-53.5), indicates industrial activity will increase in the coming months.  Moreover, production rose 3.2% Y/Y.  Unemployment was remarkably low, decreasing .1% to 3%.  And the Japanese consumer continues to spend, helping to raise retail sales 1%.  Finally, the yen’s low levels should help to spur exports over the first half of the year:

     The monthly releases from Markit were the only economic numbers from the UK.  Manufacturing was off slightly, but it still registered a positive 54.6 thanks to an increase in production and new export orders.  The low level of the sterling relative to the dollar and euro is clearly helping.  The UK service sector is still expanding: the headline number decreased from 54.5-53.3.  Activity and new work are still positive, although rising cost pressures are starting to hit bottom lines.


US Equity and Economic Review: Great Fundamentals and Technicals

      On Tuesday, the BEA released the second estimate of 4Q GDP.  While the 1.9% headline number was uninspiring, the 6.6% decline in exports was the primary cause.  Personal consumption expenditures rose 3%, helped by a very impressive 11.5% rise in durable goods purchases. A 9% uptick in residential building along with a 1.9 boost in equipment investment contributed to overall investment increasing 9%.  As this following graph shows, the huge Q/Q drop in exports more than offset the positive contributions from personal spending and investment:

 Also, note that an export decline of this magnitude only occurred in 3 other quarters over the last 5 years.

     The BEA also released personal income numbers this week.  The chained disposable income and personal consumption expenditures both declined.  However, this is only 1 month of data in an otherwise bullish data series.  And the 1-month contraction stands in stark contrast with the Conference Board’s consumer confidence number rising to a 15-year high. 

     Durable goods increased 1.8%, but transport orders were the sole reason for the increase.  The ex-transport number was -.2.  But on the plus side, non-defense capital goods orders rose an impressive 3.6%, which continues this data series’ recent uptick in activity:

However, the durable goods data series continues its move sideways between the 220 and 240 million level, where it’s been for the last 4 years:

     Finally, ISM released their manufacturing and service numbers this month.  The manufacturing number increased 1.7 to 57.7; new orders rose 4.7 while production increased 1.5.  Prices, however, are a still elevated 68.  The service sector headline number increased 1.1 to 57.6 with both new orders and employment growing.  Both data series contain a positive anecdotal comments section.  The combined reading of both numbers is for continued growth and perhaps some acceleration in business activity in the next few months.    

     Economic Conclusion: this weeks’ news was positive.  The ISM manufacturing and service sector readings were the week’s strongest news; they indicate U.S. business is doing well.  Although the 4Q GDP headline number was disappointing, the internals were far less so.  Best of all, U.S. business is spending on investment again, which is a welcome development.  Durable goods orders continue to move sideways – which continues its three year holding-pattern trajectory.  While we’d prefer to see this statistic increase, the 3-year printing between $220 and $240 million still indicates the economy is moderately healthy. 

     Market Overview: the market has performed very well since the election:

The market’s total increase is about 15% -- which would be a great return for an entire year.  Better still, the chart is technically sound.  There’s a first rally from 207-227, following by a multiple month consolidation between 222-230.  This allowed the market to consolidate gains before moving higher in early February.  There are, as always, counter-arguments that the rally is near its end, which are clear on the weekly chart:

The percentage of stocks about the 200 and 50-day EMAs are near multiple year highs while the MACD and RSI are both over-extended. 

     The post-election rally is occurring against a solid and improving economic backdrop.  Business and consumer confidence rose after the election.  Business owners believe the new administration will be very pro-business, with an agenda to lower taxes and regulations.  Consumers also believe Trump will be positive for the economy.  Just as importantly, 4Q corporate earnings – the mother’s milk of stock valuations – were very positive:

As of Wednesday, March 1st, we have seen Q4 results from 484 S&P 500 members or 98.7% of the index’s total membership. Total earnings for these 484 index members are up +7.4% on +4.9% higher revenues, with 68.4% beating EPS estimates and 54.1% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 40.3%.

And while earnings have been positive, the market remains expensive, with a high current and forward PE ratio.

     So – that does this mean going forward?   As we have been for the last 18-24 months, the market is between growing earnings and an expanding economy on one hand and an expensive valuation on the other.


US Bond Market Week in Review: Rates Are Increasing In March

      The Fed Chorus calling for rate hikes is growing in number and intensity.  In fact, there is now near-unanimous calls for a rate increase in the near future.  Fed Chair Yellen all but stated that the markets should expect a rate hike in March:

Federal Reserve Chair Janet Yellen capped a week of rising expectations about an imminent interest-rate increase by explicitly supporting a hike in mid-March if U.S. economic progress persists. “At our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in the text of a speech Friday at the Executives’ Club of Chicago.

San Francisco Fed President Williams – whose bank has provided key research on the current natural rate of interest – is now in the hawkish camp as is the previously dovish Brainard.  NY Fed chair Dudley is on board as is Dallas President Kaplan and, Philly Fed President Harker.  In short, barring a cataclysmic economic development between now mid-March, a rate hike appears a foregone conclusion. 

     Given the strength of recent data and the current low-rate environment, it’s difficult to see any central banker not arguing for at least 1 rate hike this year.  As for prices, most indexes are either slightly above the Fed’s 2% target or fast approaching that benchmark:

The above table is from the Cleveland Fed’s “inflation central” page; it clearly shows that the Y/Y pace of change of the BLS’s CPI gauge, along with the bank’s trimmed mean measure, are all above 2%.  And Wednesday’s personal income report had PCE price indexes right below the 2% level:

The top chart shows that the core rate (in red) continues to be just below 2%.  But the overall measure (in blue) shows.  The bottom chart illustrates the that energy prices are the primary reason; they’re playing statistical “catch-up” after several years of dragging price indexes lower.       

     With the exception of labor utilization, all major employment metrics are at, near, or slightly above full employment:

The right side of the chart shows that employer behavior statistics are now above levels recorded at the height of the previous expansion.  This is consistent with the recent Beige Book noting that some employers are having difficulties finding employees.  But the left side of the chart shows that labor utilization is below previous highs which is consistent with the declining labor force participation rate and higher levels of labor under-utilization for workers with lower educational attainment. 

     Currently, the effective Federal Funds rate is .66% while San Francisco Fed research indicates that the natural rate of interest is about 1%.  This gives the Fed room to increase rates at least 25 basis points while note raising rates so far as to thwart economic growth.  That means we can expect a hike to the 1% this month.