Saturday, December 8, 2018

Weekly Indicators for December 3 - 7 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The long leading forecast has now been negative for four weeks in a row. Please remember that clicking and reading, besides being educational, helps reward me for the work I put into this.

Friday, December 7, 2018

November jobs report: another good report with some signs of deceleration

 - by New Deal democrat

  • +155,000 jobs added
  • U3 unemployment rate unchanged at 3.7% 
  • U6 underemployment rate rose 0.2% from 7.4% to 7.6% 
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:  rose +88,000 from 5.309 million to 5.397 million   
  • Part time for economic reasons: rose +181,000 from 4.621 million to 4.802 million 
  • Employment/population ratio ages 25-54: unchanged at 79.7% 
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.07 from  $22.89 to $22.95, up +3.1% 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 +27,000 for an average of +20.000/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 rose +400 for an average of +75/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
September was revised downward by -13,000. October was revised upward by +1,000, for a net change of -12,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.
  • the average manufacturing workweek was unchanged at 40.8 hours. This is one of the 10 components of the LEI.
  • construction jobs rose by +6300. YoY construction jobs are up +71,400.  
  • temporary jobs rose by +8300. This is positive, but marks continued deceleration from its 12 month average of +15,000.
  • the number of people unemployed for 5 weeks or less rose by +69,000 from 2,057,000 to 2,126,000.  The post-recession low was set six 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 +32,000 and  is up +563,000 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 +0.7%.     
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey increased by +233,000  jobs.  This represents an increase of 2,759,000 jobs YoY vs. 2,443,000 in the establishment survey.    
  • Government jobs decreased by -6,000.
  • the overall employment to population ratio for all ages 16 and up was unchanged at  60.6% m/m and is +0.5% YoY.          
  • The labor force participation rate was unchanged at 62.9% m/m and is up +0.2% YoY.


This was another good report. The worst that can be said is that it is a deceleration from last month's excellent report, which I described as overall the best of this entire expansion. Perhaps the most positive aspect of this report was the nice pop in aggregate payrolls, up 0.7%, and that nominal wages for average workers coninued to increase more than 3% YoY.

There was a little fraying around the edges, as involuntary part time employment, the U-6 underemployment rate, and the number of those who aren't even looking but would like a job now all increased. Temporary employment, a particularly good leading indicator for overall employment, shows continued signs of deceleration (growth, but at a slower pace).

Bottom line: clear sailing in the present and in the near future, with some grayish clouds perhaps on the horizon.

Thursday, December 6, 2018

Consumer spending looks like classic later cycle pattern

 - by New Deal democrat

There were a couple of reports earlier in the week that shed some light on several important sectors.

First, October residential construction spending was reported. This series lags the housing sales data, but has the advantage of being smoother than any other series, including single family permits. Here they are for the last 20 years:

As you can see, residential construction peaked at the beginning of this year and has begun a downward trajectory. It is currently off about -5%, which is about the same % it declined in 1999 (a *very* slight decline) before the 2001 recession - a business and employment recession that consumers pretty much sailed right through. I'm not anticipating this turning back up until permits do.

Second, November motor vehicle sales were reported, at 17.4 units, down -0.5% from one month before, but well within the range of this metric since the beginning of 2015 (Note: graph below only goes through October):

As you can see, it is very typical for vehicle sales to plateau like this until less than a year before a recession begins.

Since housing and cars are the two biggest consumer durable purchases, this signals that neither leading sector is growing, very typical for late cycle behavior.

In fact, the change in consumer purchasing behavior between the earlier vs. later part of expansions is so well-established that variations on it are two of my mid-cycle indicators. I went back and took a look at where we stand and, well, the results are interesting. That will be the subject of a follow-up post.

Wednesday, December 5, 2018

A note about the financial markets

 - by New Deal democrat

The markets are closed today in observation of former President George H.W. Bush's funeral. In the meantime, let me offer a brief few observations (pontifications?) about my sense of the immediate and longer term trend.

First off, here is a broad look at the last 10 years for the S&P 500 (blue, right scale) and 10 year Treasury bond (red, left scale):

The moves in the bond market look exaggerated, because the values are between 1.4% at its lowest, and 4% at its highest. Basically in the last 10 years yields on the 10 year bond completed their slow decline from about 20% in 1980, then went sideways 2011 and 2017, and this year started what I suspect will be an equally long term climb (although whether they will peak in a few decades at 6% or 600%, I have no clue).

Meanwhile the stock market quadrupled in value (!), although with a few hiccups along the way, particularly in 2010, 2011, 2015-16, and this year. 

In other words, in the past 10 years bonds paid you very little, while stocks rewarded you handsomely.

Next, let me take a look at a few of those hiccups. First, here is the 2010-11 period:

Note that on several occasions (roughly mid-2010 and mid-2011) stocks declined by roughly 10%, and bond yields declined in tandem.

The same pattern appears in October 2014 and January 2016:

This is called a "flight to safety." Stock investors get spooked for some reason or other, and run into the relative safety of bonds. Stock prices fall, and bond prices rise, which means bond yields fall.

That's what I think is happening at the moment. After a 40% run-up beginning immediately after  the 2016 US Presidential election (20% of which was in December 2017 and January 2018 alone):

this year stocks have gone sideways in roughly a 15% range:

In the broad view, investors got too exuberant in 2017 mainly, I suspect, in anticipation of the tax cut goodies, and once the goodies took effect, realized that all of their value - and then some - was already priced in. In the close-up view, the past month looks like another "flight to safety."  

NOTE: Complete speculation alert!: Because these things tend to inflict surprise on as many people as possible, my *guess* is that the carnage will continue until roughly the moment that 2 to 10 year bond yields invert. Then, once people are sure that the end is nigh, both will reverse higher, at least temporarily ending the inversion.

Finally, what is also interesting about this year is that it appears to mark a "change of season" in the relationship between stock and bond performance. From 1981 through 1998, stock prices and bond yields generally moved in the opposite directions (stocks up, yields down). Then, from 1998 until this past January, bond yields and stock prices tended to move in the same direction -- not on a daily basis, but in the longer view. This year, as the first and third graphs above show, stock prices and bond yields have again generally become mirror images of one another.

This year's pattern (with rising bond yields) last happened in the 1950s, which was a period of "reflation," i.e., bond yields and the YoY change in prices gradually increased. That's another reason why I think we have started a new secular financial era.

End of observations/pontifications.

Tuesday, December 4, 2018

Strong manufacturers new orders in November ISM report

 - by New Deal democrat

There are a lot of economic writers who won't tell you when something moves against their thesis. Those guys trumpeting a flatlining of commercial and industrial growth last year? They never heard of it this year (hint: because it's up!).

To the contrary, one of the reasons I do my Weekly Indicators piece is that it forces me to mark my forecasts to market each week. If a forecast doesn't work out, I want to undertake a post mortem and understand why.

I certainly don't have to do that today, but yesterday one piece of evidence did move against my thesis of a slowdown next year: ISM new orders for November.

As I reiterated in today's piece at Seeking Alpha on yesterday's yield curve inversion, the long leading indicators have pretty much been deteriorating all year long, to the point where for the last three weeks they have been negative. So there is simply a lot of evidence to suspect that the economy is going to follow suit after a year or so.

In the meantime, I've started to focus on whether the short leading indicators are also beginning to show signs of weakness. One such measure is manufacturers' new orders. On a semi-weekly basis, I track that via the regional Fed indexes. On a monthly basis, the ISM new orders index is the go-to metric.

Well, one month ago the ISM new orders subindex declined to nearly a 2 year low. Then, during November, the average of the five Fed regional indexes declined further. So far, looking pretty good for my hypothesis.

Then, at the last minute, the Chicago PMI Index completely blew out to the upside, including a very strong new orders index. And yesterday, the ISM report's new orders subindex for November rose back strongly. Here's the graph, from

Yesterday's reading was about average from earlier this year.

So, fair is fair. Yesterday's ISM report is contra my thesis. On the other hand, the general trend over the last few months has been a gradual backing off from extremely strong growth seen at the beginning of this year.

Monday, December 3, 2018

A one day bond inversion does not a recession make UPDATED

 - by New Deal democrat

UPDATE: I have a much more detailed look at this inversion, with graphs and historical context, Up at Seeking Alpha.

You are going to read a lot about a yield curve inversion in the US Treasury market over the next 24 hours. (As of 5:30 PM eastern time, both the 3 year and 5 year bond yield slightly less interest than the 2 year bond.) Most of the commentary will probably boil down to "WE'RE DOOOMED!!! (in the next 12 to 24 months).

Maybe. But consider that, several times, an inversion somewhere along the yield curve has been a signal for the bond market to reverse (see, 1994 and early 1998). Further, consider that the Fed and its economists can understand this matter as well. And if this material should happen to form a segment on "Fox and Friends" tomorrow morning, a Tweetstorm threatening the job of Fed Chairman Powell might ensue.

Most importantly, consider that the Fed is an actor. The Fed has agency. The Fed can react to this news and affect its future course, maybe by deciding to pause its assumed rate hike later this month.

In short, a one day bond market inversion does not a recession make

Why this Friday I'll pay particular attention to the temporary jobs number

 - by New Deal democrat

With the long leading indicators outside of corporate profits and ease of credit having turned neutral to negative, at least for now, my attention is turning more and more to the short leading indicators. And one of those -- temporary employment -- is of particular importance to the overall employment situation. It is reported as part of the overall monthly jobs report, and I will be paying particular attention to it when the November jobs report is issued this Friday.

Since the BLS started to report the series in 1991, temporary employment has tended to peak roughly 6 to 9 months before overall employment, and to bottom roughly 3 months in advance:

Here is the same information graphed as the YoY% change (note I've divided temp growth by 4 for purposes of scale):

and here is a close-up since 2012. The lead and lag times have certainly been variable, but they are nevertheless clear:

The simple takeaway from the above is that temporary employment is still growing, which is positive for the jobs market in the coming months. BUT, while it hasn't turned negative, that growth began to decelerate one year ago, and has slowed substantially in the last six months, causing YoY growth to be cut in half.

As a result, I am expecting the slowdown in growth to begin showing up in the overall employment numbers. Here's what the monthly numbers look like since a little over a year ago:

Over the three months beginning last November, monthly jobs growth averaged a little under 190,000. While the monthly numbers a way too volatile, a slowdown to under 175,000 job gains per month in the next few months looks reasonable.

For completeness' sake, I've also frequently noted that real retail sales, while very noisy m/m, has a good track record of leading employment by several months. Here's the YoY% look at that since 2010:

This has also moderated as September 2017's +1.7% monthly gain has disappeared from the YoY comparisons. It's too soon to know for sure if real retail sales are confirming the recent slowdown in temp hiring.

In any event, on Friday I'm going to pay particular attention to the temp hiring number, and if that slowdown continues, I'll start highlighting it in my monthly post on the jobs report.