Saturday, December 22, 2018

Weekly Indicators for December 17 - 21 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Continued deterioration in some of the short leading indicators (like, say, the stock market!) is masking some marginal improvement in the long leading forecast. Sentiment on the economy is so negative that it reminds me of the *non*-recession that was telegraphed by weakening data at the end of 1994.

As usual, clicking over and reading should be informative, and it also helps reward me for my efforts.

Friday, December 21, 2018

Could an Oil Patch decline turn a 2019 slowdown into an outright recession?

 - by New Deal democrat

One of the items I mentioned in my piece yesterday at Seeking Alpha was the recent big decline in oil prices. Please go read the piece, it puts a couple of pennies in my pocket! But in that article I referenced the decline in industrial production that was caused by the 2014-15 decline in gas prices. I wanted to follow up a little here. 

In 2014 into early 2015, Oil prices declined by almost 75%, from a little under $110/barrel to a little under $30/barrel. Gas prices declined from close to $4/gallon to about $1.75/gallon:

The recent decline in oil and gas prices, while significant, is less than half of that.

Energy extraction is counted in the "mining" component of industrial production, but even the "manufacturing" component declined between the end of 2014 and mid-2016:

At the time I called it the "shallow industrial recession." While GDP never turned outright negative, real GDP slowed to 1% annualized in Q3 2016 and 0.4% in Q4 of that year. That's a real slowdown!

So, why wasn't there an actual recession?  Because employment, sales, and income continued to rise. As I and almost everybody else said at the time, the big decline in gas prices was a boon to consumers.  And indeed it was, as shown in the below graph of real personal income (red) and real personal spending (blue)(note: in the graph both series are normed to 100 as of the bottom of the recession in 2009):

In fact, as you can see in the graph, both series not only rose, but, especially for spending, both rose a little more steeply in 2016. In other words, the decline in gas prices, which showed up as a decline in inflation, put more "real" money in consumers' pockets, and they spent it, and then some. (Note: the graph does not include this morning's +0.1% increase in real personal income and +0.3% increase in real personal spending for November),

This shows up in the next graph, which is the personal saving rate:

Preliminarily, note that in 2012 there was a 2% FICA tax rebate, which shows up as an increase in the savings rate, which then reversed in January 2013. But notice that consumers kept savings constant in 2015, and then dug into their pockets and spent a little more vs. saving in early 2016. (Note: graph does not show this morning's small decline in the savings rate).

While I claim no expertise whatsoever it what will happen to the price of gas and oil from here, what I can say is that, if prices remain low or continue lower, a smaller version of the 2015-16 pattern in both production and consumption is a good simple model. That in turn suggests that there would be pain in the Oil Patch, flatness in manufacturing production, and a mild increase in income and consumption.

The problem, of course, is that these consequences are piled on top of the slowdown that has already been strongly suggested by the flatness in the long leading indicators for the past 7 months, and the haphazard and generally negative effects of Trump's trade wars that were initiated since then.

In other words, the effects of a knock to "Saudi America" together with the effects of the trade wars, might be enough to turn a slowdown next summer that already looks "baked in the cake" into a recession. I'm not changing my opinion yet, but the argument is powerful, and I'm chewing it over.

Thursday, December 20, 2018

The Fed scrapes Scylla after careening into Charybdis

 - by New Deal democrat

In the past several years, I have described the Fed as trying to steer in between the Scylla of a yield curve inversion and the Charybdis of higher rates wounding the housing market.

Recently several trends have reversed. This offers some relief to housing, but more risks to the economy as a whole. This post is Up at Seeking Alpha.

By the way, several times yesterday and today, the yield curve inversion has spread to the one year vs. five year yield.

Wednesday, December 19, 2018

The Transportation Slowdown

 - by New Deal democrat

Well over 100 years ago, Charles Dow (he of the Dow Jones Industrial Average) posited a theory that industrial and transportation stock prices should move in tandem. Why? Because everything that factories produced had to be transported to market for delivery.

So it is of interest that FedEx said yesterday that its business has been slowing down. And an important trucking transportation metric softened in November, as reported last week.

But readers of my "Weekly Indicators" columns got a heads up over two months ago.

I explain why in a post over at Seeking Alpha.

Tuesday, December 18, 2018

November housing permits boosted by multifamily dwellings

 - by New Deal democrat

November was a *relatively* good month for housing permits, as in, improved *relative* to most of this year, although not at the heights of last winter.

Most importantly, the least volatile number, single family permits, was flat compared with last month, and down -2% from a year ago:

There's no change of trend here.

Total permits did increase decently, and are up (less than 1%) YoY, although below their previous highs of January, March, and April:

The improvement came in multi-unit dwellings, which had a nice pop this month:

These are somewhat of an "alternative good" to single family homes, so the improvement may well reflect the stress of higher sales and mortgage costs.

Starts, which tend to lag permits by a month or so, still reflect the poor readings of the last few months there:

Probably some of the improvement in permits in November was due to mortgage rates, which declined a little at both the beginning and end of November:

Note, however, that mortgage rates are still above where they were when we had the housing peak last winter, and prices are higher as well. So, while I expect continued improvement in December, I don't think there's enough of a boost to push housing to significant new highs.

Monday, December 17, 2018

The US economy did not boom in 2018

 - by New Deal democrat

At the beginning of each year, I try to identify economic series that I think will be most important in the next 12 months.  This year I asked: Is the US economy going to enter a Boom in 2018?

There is no standard definition of a Boom. But in my lifetime there have been two occasions when the "good times" feeling was palpable, and the economy was working extremely well on a very broad basis: the 1960s and the late 1990s tech era. During both times,  employment was rampant and average people felt that their situations were going well.

Back in January I identified five markers that, taken together, marked off the two eras as unique: 
  •  the low unemployment rate 
  •  the duration of a very good rate of growth of industrial production
  •  strong growth in real average hourly wages
  •  strong growth in real aggregate hourly wages, and 
  •  increasing inflation.
Now that the year is ending, let's update all of these.

1. Unemployment remains very low

In both the 1960s and late 1990s, the unemployment rate (note that the U6 underemployment rate wasn't reported in its current configuration until 1994, and so is not helpful), hit 4.5% or below for extended periods of time:

While these weren't the only two periods of low unemployment, they are among those that stand out.

We had already hit that marker at the beginning of the year, and through the course of the year, it has only improved:

The unemployment rate is now the lowest in 48 years, since 1970.

2. Industrial production did briefly boom, but has backed off.

During both the 1960s and 1990s, production grew at or over 4% a year for extended periods of time, not just right after the end of a recession.  At the beginning of this year, production was under 4%:  

It did surge above 4% during the three months of the third quarter, but for the last two months YoY growth in industrial production is back below 4%:

3.  Real average hourly wages failed to ignite

In contrast to other expansions, during the 1960s and the late 1990s, real average hourly earnings also grew at roughly 1% YoY or better, and even exceeded 2.5% growth for significant periods:

During the current expansion, by contrast, real wages have only grown by more than 1% when gas prices have declined dramatically. In 2018, the situation continued: real average hourly wages grew by no more than 0.3% YoY until the last three months, when a big decline in gas prices caused consumer inflation to subside, leading to a YoY rate of growth of exactly 1% in November:

4. Real aggregate payrolls continue to grow modestly

 During the 1960s and 1990s booms (as well as some other expansions), real aggregate earnings grew at a rate of 4% YoY or better, for extended periods of time:

By contrast, during this expansion, and continuing this year, real aggregate payrolls have averaged growth of about 2.5% a year:

This is decent, but it's simply not a boom.

5. Inflation has waned

The fifth and final  marker of a Boom -- probably as the byproduct of the first four -- is an increase in the YoY rate of inflation:

A boom means that resources are getting constrained, so bidding for them intensifies.

The rate of consumer inflation did increase throughout the first half of this year, but since July has waned, and with one month's data left to go, is only 0.1% higher (2.2% vs. 2.1%) than the rate of inflation at the beginning of the year:

To sum up, the production side of US economy, which was doing well at the beginning of 2018, did briefly boom during the summer, but the consumer side never joined it. Only one of the five markers of a boom -- low unemployment -- persisted through the year. The US economy did not boom in 2018, and if anything is likely to decelerate sharply in 2019.