Saturday, August 4, 2018

Weekly Indicators for July 30 - August 3 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha. The old vaudeville sketch comes to mind: "Niagara Falls.  Slowly I turn. Step by step ...."

Not only are these weekly posts intellectually edifying, but since clicking over and reading it puts a penny in my pocket, it is the epitome of polite etiquette.

Friday, August 3, 2018

July jobs report: booming jobs market, and a surge in participation continues to depress wage growth

 - by New Deal democrat

  • +157,000 jobs added
  • U3 unemployment rate down -0.1% from 4.0% to 3.9%
  • U6 underemployment rate down -0.3% from 7.8% to 7.5% (new expansion low)
Here are the headlines on wages and the broader measures of underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now:  down -95,000 from 5.258 million to 5.163 million   
  • Part time for economic reasons: down -176,000 from 4.743 million to 4.567 million (new expansion low)
  • Employment/population ratio ages 25-54: up 0.2% from 79.3% to 79.5% (new expansion high)
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.03 from  $22.62 to $22.65, up +2.7% 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.)  
Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  
  • Manufacturing jobs rose +37,000 for an average of +29,000/month in the past year vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs were unchanged for an average of +100/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
May was revised upward by +24,000. June was also revised upward by +35,000, for a net change of +59,000.   

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were positive.
  • the average manufacturing workweek was unchanged at 40.9 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +19,000. YoY construction jobs are up +308,000.  
  • temporary jobs increased by +27,900. 
  • the number of people unemployed for 5 weeks or less decreased by -136,000 from 2,227,000 to 2,091,000.  The post-recession low was set two months ago at 2,034,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime was unchanged at 3.5 hours.
  • Professional and business employment (generally higher-paying jobs) increased by +51,000 and  is up +518,000 YoY.

  • the index of aggregate hours worked for non-managerial workers rose by 0.1%.
  •  the index of aggregate payrolls for non-managerial workers rose by 0.3%.     
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey increased by  +391,000  jobs.  This represents an increase of 2,454,000 jobs YoY vs. 2,400,000 in the establishment survey.      
  • Government jobs decreased by -13,000.
  • the overall employment to population ratio for all ages 16 and up rose +0.1% from 60.4% m/m to 60.5% and is up 0.3% YoY.          
  • The labor force participation rate was unchanged at 62.9%  and is also unchanged YoY  


The bottom line from this report is that employment is booming; wages still aren't.

Although the headline number was average, the revisions to the last two months made them even more positive than the original great numbers. Meanwhile the prime age employment to population ratio, involuntary part time employment, and the underemployment rate all reached their best levels of this expansion. Based on the U6 number, we are probably only about 0.5% away from "full employment."

Meanwhile, that big wage growth that was supposed to come because of that big tax cut for the wealthy and corporations last December?  Still hasn't happened. Don't hold your breath.

As I've written a number of times in the past year, an outsized jump in the rate of people entering the workforce -- which was very much in evidence in the numbers this month, and YoY is up almost 1% -- appears to be acting to depress wage growth in the short term.

As consumer spending was very good during the second quarter, we should continue to get good employment reports for a few more months. Once that abates (and it will), so will the very good employment reports.

Thursday, August 2, 2018

Early August data potpourri-palooza!

 - by New Deal democrat

As promised, here is a pithy rundown on the monthly data for July that was released earlier this week. As usual, let's take it in order of how it leads the overall economy.

Residential construction spending

This is the least volatile of any housing data, although it lags permits and starts by one to two quarters. The monthly number was down, but for now the positive trend is continuing, albeit not as strongly as in the past several years (blue is construction spending, red is single family permits):

A look at the same data as YoY% changes again shows the leading/lagging relationship. Single family permits have decelerated YoY. Residential construction spending hasn't decelerated much yet.

As interest rates have ticked higher in the last several months, I expect permits to continue to be flat, and residential construction should follow in a few months.

ISM manufacturing new orders

Manufacturing began to pick up over two years ago, and has been very strong over the last 18 months (h/t

This month the leading new orders index cooled slightly -- from white hot to red hot. It's within the range of reasonable possibility that the "less hot" trend of the last few months is the beginning of the weakness in the long leading indicators beginning to bleed over into the short leading indicators -- something I expect to happen sooner or later -- so this is something to keep an eye on. 

Motor vehicle sales

These tend to plateau during expansions, and meaningfully decline in the 6 to 12 months before a recession. This month wasn't so hot (h/t Bill McBride):

As I've said before, it would take a reading under 16 million units annualized for me to become concerned. Also, because GM is no longer reporting monthly, this metric has become much less reliable, so take with lots of grains of salt.

Personal income and spending

Everything I -- and every other -- observer has said about income over the last several years got thrown out the window last week courtesy of the GDP revisions. Ugh! *Nominal* GDP values for the last 5 years did not change significantly, but BEA decided that there was significantly less inflation than they had previously reported:

This is a classic coincident indicator, and confirms that the expansion is continuing.

As a result, "real" spending improved, and the decline in personal savings completely evaporated.

I hesitate to comment further, lest further revisions make those obsolete as well.

The Employment Cost Index

This is a quarterly report on *median* wages and benefits. As such it isn't subject to the "Bill Gates walks into a bar" type of distortion. BUT, it holds the distribution of jobs constant. In other words, it measures pay for, e.g., a constant percentage of engineers, or retail clerks, now vs. pay for engineers, or retail clerks, one quarter ago, and so on (h/t

It is the one measure of wages that has consistently shown YoY improvements over the last few years, and continued to do so in the 2nd Quarter. Where it may be inadequate is to the extent that there are job distinctions based on seniority. Thus it may not be picking up on the very large demographic trend of Boomers retiring and being replaced by Millennials (old folks being replaced by young folks is a constant, but almost certainly has been happening disproportionately in the last decade).

Putting the data this week together, although several series declined month over month, all of them were indicative of an expansion that is continuing, and will continue in the next several quarters. And maybe even a little more spare change will be tossed in the direction of ordinary workers, which we'll find out more about in tomorrow's monthly jobs report.

Wednesday, August 1, 2018

Midyear update: long leading forecast through H1 2019 at Seeking Alpha

 - by New Deal democrat

My midyear update of the 8 long leading indicators, taking the forecast all the way through the middle of next year, is up at Seeking Alpha.

Not only is it informative, but I get a few pennies if you click and read it. So click and read it!

Btw, I don't have a lot to add to whatever you've read elsewhere on the data releases so far this week. So tomorrow I'll do a potpourri with pithy comments on each, OK?

Tuesday, July 31, 2018

Mortgage rates probably have to top 5% to tip housing into a recession-leading downturn

 - by New Deal democrat

I've pointed out many times that, generally speaking, mortgage rates lead home sales. It's not the only thing -- demographics certainly plays an important role -- but over the long term interest rates have been very important.

I have run the graph comparing mortgage rates to housing permits many times. In the graph below, I'm using a slightly different housing metric -- private residential fixed investment as a share of GDP, both nominal (blue) and real (green), current through last Friday's report on Q2 GDP. Here's the long term view:

We can see the leading relationship over the large majority of time frames in the last 50 years, with a few notable exceptions: the late 1960s and 1970s *huge* demographic tailwind of Baby Boomers reaching home-buying age, the 2000s housing bubble and bust, and 2014 (mainly due to the Millennial generation tailwind).

Here's a close-up of this same graph beginning in 2015:

The increase in mortgage rates since late 2016 (blue in the graph bleow) has had a larger effect on private residential investment than the 2013-14 episode, probably because house prices are higher in real terms, as shown in the below comparison with wages (red): 

House prices were near their 2012 housing bust bottom the first time mortgage rates went up. Now they are about 20% higher in real terms.

Finally, here is a more granular view of Treasury and mortgage interest rates over the past 18 months:

The decline in mortgage rates back below 4% in the middle of last year is probably what sparked the big increase in housing permits, starts, and sales last autumn and winter.

But because mortgage interest rates have actually increased a little bit over the last six months, I'm not expecting a similar rebound in housing this autumn. 

At the same time, I can't see much of a significant outright *decline* in YoY housing sale metrics -- on the order of what we saw in 1999 before the 2001 recession -- unless mortgage rates increase, at a minimum, to over 5%, and probably to 5.25%. We'll see.

Monday, July 30, 2018

Commercial bond yield inversions and recessions

 - by New Deal democrat

When my article on the yield curve was posted at Seeking Alpha last week, I got feedback that I ought to look at commercial bond yields as well, with some specific suggestions.

I did that, and I thought I would share the results.

One series that goes all the way back before the Civil War is the yield on commercial paper in New York. After 1971, it was discontinued, but AA-rated commercial paper rates took its place. Meanwhile AAA-rated corporate bonds (lower-yielding and less volatile than other grades) have been tracked since 1919.  That means that we can put together the relationship between short term and longer term corporate bond yields going back just one year short of a century.

In the below two graphs, AAA corporate bonds are shown in blue, the three sequential commercial paper rates shown in shades of red. I have overlapped those series as much as possible to show that the changeover makes no material difference.

Here is 1919 through 1971:

and 1971 to the present (sorry, I accidentally cut this off in 2015. Since the 3 month AA paper has risen gradually to 2% yields):

This gives us a result very similar to that of the Fed Discount and Funds rates vs. long term Treasuries.  An inversion is always bad (except for 1966), but inversions don't always occur. Most importantly, note that commercial bond yield spread never did quite invert before the Great Recession.

Because it does seem that the difference in the two yields generally tightens before recessions occur, I also looked at the two time periods that way, by subtracting short term commercial rates from long term commercial rates:

It's noteworthy that even in those cases, a tightening by 1/2 of the highest term spread between long and short term yields always signals a recession within 2 years, with the very notable exceptions of the mid-1960s and the late 1990s. But again, there was no appreciable tightening before the 1938, 1945, and 1950 recessions. 

Note, by the way, that this year corporate term spreads have decreased by more than 1/2 from their expansion high, indicating heightened risk (but not a certainty) of a recession within 2 years.

The bottom line I hope you take away from all of my writing about the yield curve is that, while it is a very useful metric, it is not foolproof, and ought to be used in conjunction with other reliable metrics emanating from other sectors of the economy.