Saturday, May 12, 2018

Weekly Indicators for May 7 - 11 at

 - by New Deal democrat

My Weekly Indicators post is up at The general situation with regard to interest rates continues to deteriorate ever so slightly towards being negative.

Friday, May 11, 2018

Real wages and unemployment update: April 2018

 - by New Deal democrat

Now that we have the inflation numbers for April, let's update the wage situation for ordinary Americans.

Real wages YoY are only up +0.2%:

More significantly, they are still down -0.3% from their most recent high 9 months ago:

They are also only up +0.2% for the entire last 2 years and 2 months.

Increased consumption by ordinary Americans isn't up because they are making more in real terms. Rather, it is because they are working slightly (on average about +0.1) more hours; saving less of their paycheck (down from 3.9% to 3.1% in the last 12 months); and because more people are employed (discussed below).

Real *aggregate* wages tell us how much more in total average Americans are earning. This is up +24.9% since its post-recession bottom in October 2009:

Here's how that compares with other economic expansions over the last half century:

Aggregate wages in this expansion have risen for 102 months so far. At a total of +24.9%, this expansion is behind only the 1960s and 1990s. But on average aggregate wages have only grown .24% per month, still in second to last place just ahead of the 2000s expansion and slightly behind the 1980s.

I expect aggregate wage growth to decelerate sharply before the onset of the next recession. It hasn't happened yet:

Turning from wages to unemployment, weekly initial jobless claims tend to lead the unemployment rate by several months. Just to change things up a little bit, the below graph shows this comparison with the U6 underemployment rate:

Initial jobless claims have been making new 45+ year lows several times in the last 6 weeks, so the decline in the unemployment rate to a new multi-decade low last month was not a surprise, as shown in this close-up of the last 8 years: 

The decline in the unemployment rate in the April jobs report has been criticized as being due solely to a decline in the number of people in the labor force. It's worth noting that if that decline had only been about 30,000 less, the unemployment rate still would have declined, albeit only by -0.1% rather than -0.2%.

Generally speaking, at the moment the economic condition of the American working and middle class is better than it has been in nearly 20 years. But this is mainly due to the low unemployment rate and paltry rate of layoffs, and the steep decline in gas prices between 2014-16 which resulted in "real" wage growth, rather than any significant wage gains.

Thursday, May 10, 2018

Gimme credit: two long leading indicators trend in opposing directions

 - by New Deal democrat

The Senior Loan Officer Survey for Q1 was reported on Tuesday.

Meanwhile, this morning's April CPI allows us to update real M1.

This post is up at

Wednesday, May 9, 2018

Two real economic consequences of the Trump presidency

 - by New Deal democrat

Next week we will be 1/3 of the way through Trump's Presidential term. Last year I used to point out that it was really still Obama's economy, as the GOP had failed to pass, nor Trump commence, any economic policy of consequence.

That is no longer the case.

In late December the GOP Congress passed and Trump signed their huge giveaway for the wealthy. Yesterday, Trump pulled out of the Iran nuclear deal. Both of these are going to have significant consequences for average Americans.

First, Trump's election caused interest rates to spike. Wall Street guessed that there would be lots more business spending, meaning a stronger economy with higher inflation. As nothing much happened in 2017, interest rates settled back down somewhat.  But then in late December the tax bill was passed, and shortly thereafter interest rates spiked to five year highs:

As I write this, 10 year Treasury yields are back over 3%. More importantly, mortgage rates are also at 5 year highs:

This is about 1.2% higher than just before the Presidential election. On at $300,000 house, that translates to $3600 a year in additional interest.

Second, as I write this Oil prices are over $71/barrel. This is a 3 year high:

Oil prices have recovered about half of their steep 2014 decline.

Prices for gas at the pump are following:

Nationwide gas prices are averaging about $2.80 a gallon at the moment. Since it takes several weeks for oil prices to feed through into gas prices, prices at the pump are likely to exceed $3 a gallon shortly.  That is the sort of thing that consumers notice.

Certainly much of the increase in oil and gas prices is part of the typical commodity cycle, in which "the remedy for low (high) gas prices, is low (high) gas prices." But the recent increase is at  least partly a reaction to the likely consequences of further destabilization in the middle east.

So, Trump's Presidency is beginning to have real consequences for ordinary Americans. The markets believe that the effects are stagflationary, i.e., leading to both increased inflation and decreased demand.

Tuesday, May 8, 2018

March JOLTS report: powerful further evidence of a taboo against rasing wages

 - by New Deal democrat

The March JOLTS report this morning is powerful further evidence that raising wages (or training new workers) has become a taboo.

Just about everyone thinks that, faced with a worker shortage, "rational" employers will offer higher wages to fill the empty skilled positions. This in turn will draw more marginal potential workers into open unskilled positions.

That's the theory, anyway.

What is really happening -- as so breathtakingly shown this morning -- is that by and large employers will refuse to raise wages, and then complain about their unfilled job openings.

As Exhibit "A," I give you job openings (blue) vs. actual hires (red) in this morning's report:

As a refresher, unlike the jobs report, which tabulates the net gain or loss of hiring over firing, the JOLTS report breaks the labor market down into openings, hirings, firings, quits, and total separations.

Not only has hiring been flat for the last 10 months, but it was higher than today's level in November 2015, January 2016, and January 2017. Meanwhile job openings have skyrocketed by 20% since January 2017, and 25% since the end of 2015!

This can only be considered a "skills mismatch" for the wages you want to pay, and if you refuse to train workers without existing matching skills.

Incidentally, Paul Krugman may be ready to embrace the idea of a taboo against raising wages, although for now he is plumping for the "employers are afraid of getting stuck with a highly paid workforce when the next recession comes" hypothesis. The problem with that particular hypothesis, though, is that such skittish employers -- a lot of them anyway -- won't bother to post new job openings, since they know they would need to raise wages to fill them. The big spike in openings in this morning's report suggests instead that employers are refusing to get the message.

Turning to other noteworthy items in the report, as a general rule, historically hiring leads firing.  While the one big shortcoming of this report is that it has only covered one full business cycle, during that time hires have peaked and troughed before separations. This is manifest when we compare hiring (red) and total separations (blue) on a quarterly basis as it existed through the end of the third quarter of 2017:

Here is the monthly data through this morning's report for the last several years:

The updated graph shows hiring last making a peak in October 2017.  Meanwhile separations actually peaked before then, in July of last year, with a clear downtrend since, another significant revision since last month. *if* both have made their expansion highs, needless to say that would be important.

Further, in the previous cycle, after hires stagnated, shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

[Note: above graph show quarterly data to smooth out noise]

Here are voluntary quits vs. layoffs and discharges on a monthly basis for the last 2 years:

If hiring and total separations have indeed peaked for this cycle, based on the last cycle I would expect quits to continue to improve for a short while -- and they have -- before also beginning to decline. As a counterpoint to that, separations have approached their bottom, a very good sign.

And indeed, I don't even see a yellow flag until hires and separations go negative YoY, as they did before well before the last recession, which they haven't yet:

Two months from now when the YoY comparisons get much harder, if we haven't established any new highs in hires and total separations, and they are at or below zero -- which is a real possibility -- then we may have confirmation of a late-cycle trend.

Monday, May 7, 2018

The simple jobs and interest rates model generates a yellow flag

 - by New Deal democrat

Several months ago, I started toying with a simple model of interest rates and job growth.* Based on the historical evidence, I suggested that:

1. a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

2. the YoY change in the Fed funds rate (inverted in the graph below) also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.

One shortfall of that model is that there are two "false negatives" in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.

A variation on the model is that, since the 1950s, the simple rise in the Fed funds rate from its low near the beginning of an expansion, has always exceed the YoY% change in job growth *before* the onset of all of the subsequent recessions. This variation has limited value as a "yellow flag," strongly cautioning that there is a heightened probability of a recession is within 18 months, with the "red flag" suggesting the near certainty of a recession within 12 months only if/when the YoY increase in interest rates exceeds the (decelerating) YoY% growth in jobs.

With YoY employment growth at 1.6%, and the YoY change in the Fed funds rate of 0.75%, there is no "red flag" warning:

But because the total increase in the Fed funds rate during this expansion has been 1.7%, the "yellow flag" has been activated:

Further, because the Fed funds rate has been hiked by 0.75% in the last year, that suggests that a further YoY% decline in payrolls growth is already "baked in the cake" over the next 12-24 months, to a level of roughly +0.8% YoY:

That suggests that if the Fed makes 3 more 0.25% interest rate hikes in the next year, the "red flag" will be triggered at some point in that 12-24 month window.


*N.B. This is only one of a number of forecasting metrics I use. The most important is the long/short leading indicator method based on the work of Prof. Geoffrey Moore and Prof. Edward Leamer. This is supplemented by the much more timely but volatile "Weekly Indicators" method. I also have a fundamentals-based forecast based on consumer behavior, and a less-organized corporate model as well.