Saturday, August 12, 2017

Weekly Indicators for August 7 - 11 at

 - by New Deal democrat

My Weekly Indicators post is up at

It's the dog days of summer, and not much is changing.

Friday, August 11, 2017

On consumer inflation, it's a gas! Plus, the rent is too d@#^ high

 - by New Deal democrat

It's pretty clear that inflation isn't going to hit the Fed's ceil... er, target, of 2% for awhile at least.

All throughout this 8 year expansion, consumer inflation has been driven by two things:

1. the price of gas
2. owner's equivalent rent.

I show all three YoY in the graph below (gas is divided by 12 for scale):

First of all, you can see that most of the *variation* in headline CPI aligns very well with changes in the price of gas.

Secondly, you can see that, even when gas prices have been declining YoY, headline CPI has been running roughly in the 0% to 2% range.  That's because owner's equivalent rent, which is almost 40% of CPI, has been running from 2% to 3.5% YoY for most of the expansion.

I don't see either dynamic changing in the near future, at least until enough entry level housing is built to satisfy demand.

Thursday, August 10, 2017

In which I (partially) disagree with Dean Baker about the stock market

 - by New Deal democrat

Dean Baker complained yesterday about pundits who talk about the stock market in terms of economic well-being:

As someone who routinely considers both corporate profits and stock prices in terms of economic well-being, I disagree -- somewhat.

The simple fact is, corporate profits are a long leading indicator for the economy as a whole, and stock prices a short leading indicator. If both are making new 4-quarter highs, they are important signs that an economic expansion will continue -- and that means more employment and more wages for the average American. Conversely, if both are making new 4 quarter lows, there is a very good chance that jobs are about to be lost and nominal wage growth decelerate (or possibly worse).

The stock market is famously noisy -- the old saying is that it has predicted 9 of the last 4 recessions -- but the fact is, with the famous exception of 1929, stock prices have typically led both peaks and troughs in the economy, as shown in the below graphic from Doug Short:

Corporate profits are less noisy and a longer leading indicator.

In short, I disagree with Dean Baker to the extent that the *direction* of both corporate profits and stock prices are important measures of the economy. Where I agree with him is that the *intensity* of the growth or decline is not.

To show you why, here's a graph of corporate profits (blue) vs. average hourly wages for non-supervisory workers (red).  In this first graph, both are normed to 100 in 1964, when the latter series was first reported:

Notice that with one exception  (1974) corporate profits turned south in each case well before the onset of recession. Further, in the 1960s and 1970s, corporate profits and hourly wages move in proportion, and still somewhat in proportion in the 1980s. By 1992, however, corporate profits are about 2X the level of average hourly wages.

Here's the same graph, from 1992 to the present, normed to 100 in 1992 (i.e., when the relative level of corporate profits is almost twice what it was in 1964):

Once again, the *direction* of corporate profits is a good long leading indicators for when an economic expansion will end.

But the intensity is completely out of control.  By the end of 2016, corporate profits are about 3x higher compared with wages than they were in 1992 -- which means they are about 6x higher than they were in 1964.

So I partially disagree with Dean Baker. The direction, but not the intensity, of corporate profits and stock prices are worthwhile signposts for the economic well being of average Americans. At the end of the day, that is why I am interested in them.    

Wednesday, August 9, 2017

On JOLTS, I continue to dissent

 - by New Deal democrat

The only two significant items of data in the second week of the month typically had been the JOLTS report and the Labor Market Conditions Index.

I say, "had been" because the Fed has discontinued reporting the LMCI.  Here's their explanation:

Although the LMCI was reconstructed back 50 years, it was only published in real time for the last few.  I am disappointed.  Even if the Fed believes the LMCI was not giving them the accurate information they were looking for, I wish they had at least continued to publish it in real time for one full economic cycle, because it may have given other valuable information -- e.g., being a valid long leading indicator for the economy as a whole -- that wasn't on their radar.

Turning to JOLTS, I have been a dissenter about this data series for the last year.  The typical commentator has focused on job openings, which have been trending higher strongly (as they did in today's report for June):

Thus even Bill McBride calls today "another strong report."

But openings are the one aspect of the report that are not "nard" data. They can just as easily be skewed by employers trolling for resumes, perhaps laying the groundwork for visas for cheap immigrant labor, or simply refusing to offer the wage or salary that would call forth enough actual applicants to hire. Hence the disconnect between "openings" and "hires."

Rather, I prefer to focus on the "hard" data series such as hires, quits, and layoffs.  And here, the story hasn't been nearly so strong.

Let me start by comparing hires to total separations (averaged quarterly to cut down on noise):

We only have one full business cycle to compare, but since the outset of the series at the start of the Millennium, the trend has been for hires to slightly lead separations.  And hires have been stagnant for going on 2 years.

Let's compare hires with voluntary quits and also layoffs and discharges. Here we see that in the last cycle, hires stagnated, and shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

And here is the current cycle:

Once again, hires have stagnated. Perhaps even more significantly, even while quits have continued to rise, involuntary separations bottomed a year ago, and have risen on a quarterly basis ever since.  In fact, on a monthly basis June's level of layoffs was the highest in over a year:

Although FRED can't show it, the three month rolling average of layoffs is also at a 12 month high.

In short, despite the strong payrolls numbers of the last few months, JOLTS shows an employment situation that has been slowly decaying.  And by the way, the same thing is shown in the YoY change in payrolls:

So I continue to dissent.  I do not believe the JOLTS reports show strength, but rather have gradually trended weaker, even if they do not portend any imminent economic downturn.

Tuesday, August 8, 2017

The Doomers get one right

 - by New Deal democrat

Every now and then, as the saying goes, even a blind squirrel finds a nut.

Thus it is with the personal saving rate.  I explain why over at