Saturday, September 1, 2018

Weekly Indicators for August 27 - 31 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Several of the long leading indicators have deteriorated further.

Friday, August 31, 2018

Comments on personal consumption expenditures: the September anomaly and the Fed's 2% inflation ceiliing

 - by New Deal democrat

Let me make a few comments on yesterday's report on personal income and spending. Well, actually, just the spending part for now.

First, there is a long-time relationship going back 60 years in the data whereby the YoY% growth in retail sales is higher in the first part of an economic expansion, and lower in the latter part, compared with wider measures of spending, such as personal consumption expenditures (PCE's).  In fact, it is so reliable it is one of my "mid-cycle" indicators.

Well, it hasn't been that way for the past year. Here's the graph:

YoY retail sales have been higher than PCE's in the past year -- and the YoY growth has been rising. So has the economic cycle been rejuvenated?

Probably not, although the tax cut that took effect in January probably is having an effect.

It all seems to boil down to an anomalously huge monthly surge in retail sales, even after adjusting for inflation, last September. It is easily seen in this next graph, which shows the monthly change in real retail sales (red) vs. real PCE's (blue):

That's a 1.4% real, inflation-adjusted increase in retail sales in just one month!

How anomalous? Well, here's the same graph expanded back to October 2009:

Only three other months are comparable (1.0% or above), and only one of them, at the beginning of the expansion, is significantly larger.

The suspicion has been that the spike in spending was due to the hurricanes along the Gulf Coast and perhaps also the California wildfires.  If that's true, then in two months we'll see that spike drop out of the YoY comparisons, and the normal long-term relationship between retail sales and PCE's should assert itself. We'll see.

A second point I want to make is about the Fed's asymmetric 2% inflation "target." In practice, it is actually a ceiling. We had a report by the Fed staff earlier this week warning that if they don't move to increase rates now, inflation could get out of control.

Well, core PCE's are the Fed's favorite inflation metric. They are shown in blue in the graph below, which subtracts 2%, so that 2% YoY core PCE inflation is at the zero line:

I want to call your attention to two things.  First, the gold line is the 10 year Treasury rate. Note than in mid-2013 it spiked from roughly 1.5% to 3%. That was the "taper tantrum," when the Fed announced it was going to taper off its quantitative easing. This occurred with core PCE growing at less than 1.5%. Second, the red line is the Fed funds rate. The Fed started raising rates with core PCE's running only a little over 1%.

In other words, despite the fact that core PCE inflation running significantly below the Fed's alleged "target," it stopped easing and started tightening. Now that it has arrived at their "target," they are talking about the need to tighten more aggressively to prevent inflation. 

You know, in things like workers' wages.

That's a ceiling, not a target. And if anything, the asymmetric risks run the other way. But apparently the only way the Fed is going to have an "OH SHIT" moment is if there is actual wage deflation in the next recession.

Thursday, August 30, 2018

Corporate profits after taxes set a new record. But the Fed is worried about wages

 - by New Deal democrat

Yesterday in the Q2 GDP update corporate profits were reported for the first time.

Since corporate profits are one of four long leading indicators identified by Prof. Geoffrey Moore, I have updated my look at them at Seeking Alpha.

Usual shameless plug: reading this isn't just educational, it puts a few pennies in my pocket.

But of course corporate profits are a good way to measure how the producer sector is doing compared with ordinary workers. So below is a graph of corporate profits (green), the S&P 500 (blue), average hourly wages for non-managerial workers (dark red), and aggregate wages for all of those workers (light red), since the month Trump took office:

Profits are up over 17% and stock prices up over 22%. Meanwhile average workers' hourly earnings are up (before inflation) less than 3%, and even in the aggregate are up only 7%.

And the Fed is worried about wage inflation.

Wednesday, August 29, 2018

House prices continue to rise, exacerbating unaffordability

 - by New Deal democrat

Now that we have both the Case Shiller and FHFA house price reports for June, let's take a look at how they fit in to the overall market, and in particular on housing affordability.

To begin with, let me repeat the general formula for the housing market:
  • interest rates lead sales
  • sales lead prices
  • prices lead inventory
Turning to the reports, in June, the 20-city Case Shiller house price index rose 0.5% m/m:

House prices are clearly still rising.

On a YoY% basis, the index rose 6.2% (blue in the graph below). This continues a slight deceleration from the YoY% peak of 6.7% in March.  Let's compare that with YoY% growth in the least volatile measure of sales, single family permits (red, quarterly to cut down on noise) divided by 2 for scale), and the quarterly FHFA house price index (green):

On this graph it is easy to see how permits lead prices, although it is less apparent over the past few years.

So let's zoom in on the last few years, measured monthly:

Now it is easy to see that YoY prices as measured by the Case Shiller index did decelerate slightly in 2016, although the FHFA index didn't, coincident with the sharp deceleration in permits. The YoY change in single family permits peaked in the first six months of 2017, while both house price indexes continued to accelerate YoY into February and March of this year. While permits have decelerated significantly in the past year, prices have only started to decelerate in the last 4 months.

As a result of the continued surge in house prices, affordability continues to suffer. Contrasted with the  6%+ rise in house prices in the last 12 months, Sentier Research also reported today that nominal median household income only rose 2.6% YoY through July. 

Here is the graph of Sentier's monthly median household income measure through last month (h/t Doug Short):

Since we can expect house prices to continue to rise for awhile, unless mortgage rates decline, the increased unaffordability of housing means that we can expect further pressure on house sales, which as I reported last week, on balance have begun to turn negative.

Tuesday, August 28, 2018

Even if the yield curve tightens no further, there will be consequences next year

 - by New Deal democrat

Both my posts from yesterday morning and today dealt with two aspects of the implications of the Fed raising rates.

The unifying idea beneath both of them is that the Fed's raising rates is already having consequences in the economy; consequences that are likely to be amplified should the Fed continue on its present path.

And we have a pretty good idea what those consequences are likely to be, beyond employment. Four times in the 1980s and 1990s the yield curve tightened to right about where it is now, without going into full inversion or heralding an ensuing recession.

I wrote what I hope is a tour de force laying out in much fuller form what is already likely in store for the economy next year, based only on where we are already now. The editors at Seeking Alpha seem to have liked it, because they made it an "Editors Pick," and here is the link where you can read it (and, yes, put a little jingle in my pocket by doing so!).

What the compressed yield curve means for employment

  - by New Deal democrat

Aside from the threat of a recession down the road, is there cause for concern by economic Progressives in the fact that the yield curve has tightened (i.e., the difference in interest rates between long and short term bonds has become very small)?

In a word, Yes.

Four times during the 1980s and 1990s the difference in the interest yield between 2 and 10 year treasury bonds got about as low as it is now (blue in the graphs below). That occurred in 1984, 1986, 1994, and 1998. 

Even though on none of those 4 occasions a recession followed, on 3 of 4 of those occasions YoY employment gains (red, divided by 2 for scale) subsequently declined:

In both 1984 and 1994, YoY employment gains peaked within 2 months of the low point in the yield spread. In the 1980s, that decline continued right through and a little beyond the 1986 low in spreads. In both cases YoY gains in employment declined by roughly half. Only in 1998 was there no appreciable effect.

On all 4 of those occasions the Fed lowered interest rates until the economy started to rebound - quickly in the case of 3 of them.

In other words, even if the Fed stops raising rates now, and the yield curve does not get tighter or fully invert, my expectation is that monthly employment gains will decline to about half of what they have recently been -- i.e., to about 100,000 a month -- during the next year or so.

Monday, August 27, 2018

A new risk at the Fed: Donald Trump's power to fire Fed Governors

 - by New Deal democrat

Calling it "breaking with decades of presidential convention," the New York Times reported last week on Donald Trump's open criticism of recent Federal Reserve rate hikes. quoting him as telling donors at a  fund-raiser in the Hamptons:
that he had expected Mr. Powell to adhere to an easy-money monetary policy, by keeping interest rates low, when he nominated Mr. Powell in November to succeed Janet L. Yellen.... 
On Monday, Mr. Trump complained about the Fed chairman publicly, telling Reuters “I’m not thrilled with his raising of interest rates, no. I’m not thrilled.” Mr. Trump, in an interview, added “I should be given more help by the Fed” through more accomodative monetary policy....
Earlier this summer Trump had told an interviewer on CNBC: “I don’t like all of this work that we’re putting into the economy and then I see rates going up. I am not happy about it.”

Well, if there's one thing we don't expect from Donald Trump, it's breaking conventions, right?

The independence of the Federal Reserve Chair and the other appointed Governors is theoretically protected by 12 U.S.C. Section 247, which provides:
Upon the expiration of the term of any appointive member of the Federal Reserve Board in office on the date of enactment of the Banking Act of 1935, the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.
[emphasis supplied]

In other words, the Chairman and all of the other appointed governors of the Federal Reserve have exactly the protection against being fired, except "for cause," that covered FBI Director James Comey.

So, if Trump thought Fed rate hikes were harming his re-election prospects by slowing the economy, and the Fed insisted on raising rates anyway, do I think Trump would fire the Federal Reserve Chair? Or even all of the Governors?

In a heartbeat.