Saturday, January 5, 2019

Weekly Indicators for December 31 - January 4 at Seeking Alpha

 - by New Deal democrat

Forgot to do this earlier ....

My Weekly Indicator posts is up at Seeking Alpha.

The way that interest rates are behaving has a few surprising implications for other indicators.

Friday, January 4, 2019

December jobs report: 2018 goes out with a bang

 - by New Deal democrat

  • +312,000 jobs added
  • U3 unemployment rate rose +0.2% from 3.7% to 3.9% 
  • U6 underemployment rate unchanged at 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:  declined -70,000 from 5.397 million to 5.327 million   
  • Part time for economic reasons: declined - 124,000 from 4.781 million to 4.657 million 
  • Employment/population ratio ages 25-54: unchanged at 79.7% 
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.09 from  $22.95 to $23.05, up +3.4% 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 +32,000 for an average of +24.000/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 +600 for an average of +175/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
October was revised upward by +21,000. November was also revised upward by +37,000, for a net change of +56,000.

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 rose +0.1 hours from 40.8 hours to 40.9 hours. This is one of the 10 components of the LEI.
  • construction jobs rose by +32,000. YoY construction jobs are up +284,000.  
  • temporary jobs rose by +10,300. The strong YoY trend remains intact.
  • the number of people unemployed for 5 weeks or less fell by -2,000 from 2,128,000 to 2,126,000.  The post-recession low was set seven months ago at 2,034,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime rose +0.1 hour from 3.5 hours to 3.6 hours.
  • Professional and business employment (generally higher-paying jobs) increased by +43,000 and  is up +583,000 YoY.
  • the index of aggregate hours worked for non-managerial workers rose by 0.3%.
  •  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 180,000  jobs.  This represents an increase of 2,880,000 jobs YoY vs. 2,638,000 in the establishment survey.    
  • Government jobs increased by +11,000.
  • the overall employment to population ratio for all ages 16 and up remained at 60.6% m/m and is up 0.4% YoY.          
  • The labor force participation rate rose +0.2% from 62.9% m/m to 63.1% and is up +0.4% YoY.


This was a blockbuster report. About the only negative is the increase in the headline unemployment rate, which may be an artifact of the year-end household survey rebalancing (rather than revise each of the last 12 months, they simply add the revisions into the January number).

Everything else, including the leading portions of the report, was positive to strongly positive. At first glance, the gains look widespread, but I'll update if necessary once I am able to take a longer look. The gains to ordinary workers nominal wages are particularly welcome. UPDATE: The gains are widespread, but particularly so in education, healthcare,  leisure and hospitality, and somewhat in construction.

Needless to say, this report is in stark contrast to what many of the leading indicators are telling us. Since employment and production are the Queen and King of coincident indicators, respectively, I think workers will need to enjoy this while it lasts. Now would be a good time to start preparing for the downshift in trend that I think is inevitable at this point.

Thursday, January 3, 2019

December ISM manufacturing points to sharp slowdown

 - by New Deal democrat

I need to publish my first half forecast for 2019, but before I do, I want to see how a few leading indicators for December pan out. These include motor vehicle sales, the manufacturing workweek, new unemployment claims less than 5 weeks old -- and this morning's ISM manufacturing report.

To breifly recap, my long leading indicators turned neutral 7 months ago and haven't improved since, even going negative for a few weeks. As a byproduct of that, I have been waitiing on short leading indicators to decelerate as well, which they have shown strong signs of doing recently.

As part of that, two months ago I wrote that "I expect slowing [in the ISM new orders index] to continue."

Manufacturing expanded in December, as the PMI® registered 54.1 percent, a decrease of 5.2 percentage points from the November reading of 59.3 percent. “This indicates growth in manufacturing for the 28th consecutive month. The PMI®recorded a substantial softening in December and retreated to a level not seen since November 2016, when it registered 53.4 percent,” says Fiore. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
I have been using an average of the five regional Fed new orders indexes to forecast the direction of the ISM indicator.  Here's a comparison of the regional Fed averages (left) and ISM new orders (right) for all of 2018:

JAN   15   65.4
FEB   20   64.2
MAR   16   61.9
APR   17   61.2
MAY   28   63.7
JUN   24   63.5
JUL   24   60.2
AUG   17   65.1
SEP   20   61.8
OCT 18  57.4
NOV 15  62.1
DEC  8   51.1

October's 57.4 ISM reading, while very positive, was nevertheless the lowest since November 2016. Today's reading is not just below that, but is the lowest since August 2016. Here's the longer-term graph (not including this morning) from

The sharp decelerating trend in the Fed new orders indexes since May's high is apparent. Now the ISM has confirmed the deceleration in spades. I suspect this reflects both the feeding through of the weakness in the long leading indicators, and also the nearly immediate impact of Trump's trade war policies. In other words, poor Administration economic policy may have taken a slowdown that was likely to happen in a few months, and moved it forward. The silver lining is that a slowdown, however sharp and however much "baked in the cake" at this point, is not a recession

Wednesday, January 2, 2019

Unhappy new year: bond yield curve inversion spreads

 - by New Deal democrat

A month ago, when the 2- through 5-year bond yield curve first inverted, I wrote that while it might be a case of "the camel's nose is in the tent," i.e., the rest of the camel (yield curve) was likely to follow, there were a bunch of caveats:
In short, a one-day inversion over a limited portion of the bond yield curve, while more often than not heralding a full-on inversion and bad consequences to come, is by no means dispositive.
Generally speaking, for a yield curve inversion to give a true signal, it should last longer than a few days, spread out further along the yield curve, especially towards shorter yields (e.g. 6 month or 1 year yields), and deepen.

As of this morning, here's what bond yields look like:

About a week ago, for the first time, the inversion spread out to the 1-vs.5-year yield, and a secondary inversion opened up between the 1 month and 3 month yield.  Then, on Monday, the inversion spread out to the 1-vs. 7-year yield. Further, as of this morning, the 1 year vs. 10 year yield spread has shrunk to .04%. That's a big move and about .07% tighter than it has been at any point in the last year.

Note that the inverted spread between the 1 year and 3 year bond yields has deepened to -0.155%.

So, all three of my criteria for a true signal have been met: (1) the inversion has persisted; (2) the inversion has spread out along the yield curve, especially towards shorter term maturities; and (3) the inversion has deepened. 

A recession in the next 12 to 24 months is still not a sure thing. There were deeper and more persistent inversions in 1966 and 1998 without a recession following in that time frame -- although 1966 was a very deep slowdown that just missed being a recession.

But there is simply a very strong possibility that we are looking, at very least, at a big slowdown soon.

Tuesday, January 1, 2019

Happy New Year 2019

 - by New Deal democrat

Best wishes for a happy, healthy, and prosperious New Year in 2019!

This year is shaping up to be a much more challenging one than 2018. And I'll continue the same old boring and nerdy, but tried and true, analysis starting tomorrow.

Among other things, in the next week or so I expect to post my first half forecast, and then, once preliminary GDP for Q4 is reported before the end of January, my forecast going forward all the way to the end of 2019.

Sunday, December 30, 2018

On the government shutdown, Pelosi should go maximalist

 - by New Deal democrat

It's pretty clear that the House GOP has decided to simply punt the government shutdown into the new Democratic House majority's laps.

That new House Democratic majority will have two basic options: (1) go accomodationist; or (2) go maximalist.  I am here to write in support of option #(2).

To recap, before the government shutdown, the Senate had passed a stopgap measure by 100-0. When RW extremists got Trump's ear, he (as usual) welched and refused to sign any bill that did not include funding for his border "wall." The House GOP promptly passed a bill doing so, and there matters have stalled for the last 10 days.

The "accomodationist" option is for the new House majority to pass the bill that is identical to the one that already passed the Senate by 100-0. It is very unlikely that this will work.

In the first place, Mitch McConnell has announced that he will not bring to the Senate floor any bill that will be vetoed by Trump. Since Trump has already indicated he will veto the existing Senate bill, McConnell might simply refuse to bring it back up. Even if he does, it is almost certain that Trump will veto it. Even if the Senate GOP feels they cannot renege on their prior votes, a 2/3's majority must still be found in the House.

And that is where the problem is. It is simply unlikely that enough members of the House GOP are going to roll over so that the bill passes over Trump's veto.It is simply very unlikely that the House will be able to add on new demands once an "accomodationist" bill is defeated. In the far more likely event that the House fails to override Trump's veto, this puts him in the driver's seat, in the kind of negotiation he likes -- where the other side must agree to ever more escalating demands to get his assent.

The "maximalist" option is for the new Democratic House majority to lay out some new demands of their own.  Here are three good candidates, *all* of which might be added on to a House bill: (1) permanent legalization of the Dreamers; (2) permanent codification of DACA; and (3) undoing the piecemeal repealers of the ACA by the prior Congress. If they want to really be mean, they can announce that for every day that the GOP delays in approving the budget, they will deduct $1 Billion from agricultural subsidies in any budget resolution they will agree to. 

Will McConnell and Trump go ballistic? Of course! So what.

You will now have one demand on the GOP side (fund the wall) counterbalanced by three demands on the Democratic side (as stated above). This puts the Democrats in the position of being able to do some horse-trading in order to get a budget bill passed.

It is unlikely that Trump will sign a bill without being able to declare victory on funding for the "wall." Suppose the Democrats, behind closed doors, offer to approve $2.5 billion in funding (that might take over 2 years to be committed, wink wink hint hint), in return for dropping the ACA demand and tempering the DACA demand, while getting full legalization for Dreamers (which is *very* popular). This would be a very positive and doable outcome.

But the only way we are going to get a positive outcome, rather than one that involves incredible pressure being put on Democrats to cave and go crawling on their knees to Trump, is if the House Democratic majority under Pelosi starts out by going maximalist.