Saturday, March 16, 2019

Weekly Indicators for March 11 - 15 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The rebound after the government shutdown has lifted the nowcast into slightly positive territory.  Still, it seems clear at this point that the shutdown caused the already-weakening economy to skirt with recession during December and January.

In my opinion Dean Baker is correct. Recessions aren’t as sneaky as Austin Goolsbee claims in his NYT article yesterday. What the *possible* “mini-recession” of December and January has in common with the very shallow 2001 recession is that both feature a weakening economy that is then hit with exogenous events, including poor government policy (the “China shock,” Trump’s trade wars, the government shutdown) and also in 2001, the September 11 terrorist attacks.

But as Baker points out, 2001 highlighted the bursting of a stock market bubble, apparent in the long leading indicator of corporate profits. Other long leading indicators had also flashed warning signals:

  • Housing had also declined over -10%, as measured by the long leading indicator of single family housing permits.
  • Long term interest rates had climbed over 2% from their 1998 lows. 
  • Real M1 had fallen by almost -7%
  • The yield curve had inverted.
  • Bank lending had gotten tighter.
  • Real retail sales per capita had peaked a year before.
Really not sneaky at all.

UPDATE: If you don’t want to go behind the NYT’s paywall, here is what Goolsbee said, via the trusty commenter Anne at Economist’s View. Goolsbee’s position is actually pretty close to what I’ve written above. Small shocks like poor government decisions can take a weak economy and tip it into recession, although Goolsbee focuses on consumer confidence.

Friday, March 15, 2019

Industrial production weak, while JOLTS employment remains strong

 - by New Deal democrat

I’ll have more to say next week, but for now here are the headlines on this morning’s data.

Taken together, production and employment are the King and Queen of coincident indicators - certainly in terms of how the NBER scores expansions and recessions. Both February industrial production and January JOLTS for employment were reported this morning, and delivered differing messages.
First, industrial production for February was weak. While total production gained slightly (+0.1%), manufacturing production declined for the second month in a row:

Here is what that same data looks like measured YoY:
There may have been a production boom last summer, but it’s over now.
If industrial production is the King of Coincident Indicators, then employment is the Queen. The JOLTS report for January, which included substantial revisions for all of 2018, included an all-time high in the number of quits (red), and an improvement in hires (BLUE):

Not shown, but layoffs and discharges made a new 12 month low, and openings were just below theirs. If there is a fly in the ointment, it is that since midyear 2018, there has been very little improvement in all of the JOLTS metrics except for layoffs and discharges.
Basically, production and employment taken together show deceleration since summer of 2018, with production actually contracting slightly while employment continues to improve.

Initial jobless claims not at warning levels yet

 - by New Deal democrat

With the economy slowing so markedly, suddenly there is a lot I can post about!
So here is a quick note about initial jobless claims. They are a short leading indicator, and at least as smoothed over a 4 week or monthly average, they aren’t too noisy.
I have two ways of looking at them:
1. The four week moving average rises more than 10% above its low point almost once a year. But by the time it is 15% above its low, a recession is usually imminent or may even have begun. So my cutoff point is 12%, above which there is a significantly increased chance of an oncoming recession. In September, this average hit its expansion low of 206,000:

If the 4 week moving average rises above 230,600, this metric is triggered. It did hit this number last month likely due to the government shutdown, but I am discounting that.
2. If the monthly average turns higher YoY for two consecutive months, that usually gives a short warning that a recession is about to begin. As the below graph shows, it was higher YoY in February:

If it averages higher than 228,600 for March, it would hit this point. For the first two weeks of March, it is 226,000:

Triggering one metric results in a yellow flag “caution”; hitting both results in a red flag “warning.”
Although we are close in both metrics, neither has been triggered yet.

Thursday, March 14, 2019

Leading scenes from the February jobs report

 - by New Deal democrat

Let me catch up with some details from last Friday’s employment report.

As a preliminary matter, the overwhelming take was that the poor +20,000 gain was “nothing to see here, just an outlier.” The problem with that take is that, for all of 2018, the average monthly gain in jobs was just over +200,000 a month. January came in more than 100,000 above that, at +311,000 jobs, and yet I don’t recall anyone taking the same position, that it was just an “outlier” to the positive side then! Here’s a graph, from which the 2018 average of 204,500 monthly jobs gain has been subtracted, so that the variance from that average shows as positive or negative:    

So, yes, it’s true that February was a bigger outlier, to the downside, than January was, to the upside, but both were outliers. If you average the two months together, you get +165,500 jobs per month, a significant downdraft from the 2018 average.

Moving on, last week I said to pay attention to three leading sectors of jobs: temporary jobs, construction, and manufacturing. In the past I’ve shown that at least 2 of the 3 sectors contract for a number of months before any recession begins. Here’s what all three sectors look like from January 2018 to the present:

We had a contraction in temp jobs in January, from revisions, and a contraction in construction in February, after an outsized January gain. Manufacturing hung on with a small gain.

Here’s the same information graphed as the YoY% change, first over the past 8 years:

The 2015-16 “shallow industrial recession” clearly stands out as a pocket of weakness.

Now here’s a close-up since the beginning of 2018:

All three show decelerating YoY gains since roughly the beginning of last autumn.
Last week I also said that I expected the YoY pace of job gains to start decelerating. Only one month, of course, but it did do that:

YoY job gains are at the lowest in over 6 months.

Finally, let’s take a look at two more leading metrics contained in the jobs report.

First, the manufacturing work week:

Historically, this starts deteriorating before manufacturing jobs. It is presently down -0.6 hours from its peak in summer of last year. In the past a decline of -0.5 hours has typically been associated with at least a slowdown, and by the time the decline hits 1.0 hours you are on the cusp of a recession.

Next, short term unemployment of less than 5 weeks. This is one of the “short leading indicators” listed by Prof. Geoffrey Moore:

Typically if the three month average is less than 5% above its low, the expansion is intact. If that average is more than 10% above its low, a recession is near or may have just begun. Presently the three month average is 6% above its recent low. Take this with a grain of salt, because it includes the government shutdown month of January.

The bottom line is that, even averaging January with February, all of the leading employment indicators show some deterioration, but none of them are at a point where I would expect them to be if a recession were imminent.

Wednesday, March 13, 2019

More evidence for a Q4 “Recession Watch”

 - by New Deal democrat

About a month ago, based on those Q4 2018 reports that had not been delayed by the government shutdown, plus workarounds for those that were missing, I went of “Recession Watch” for Q4 of this year.

Now all of the missing pieces have been reported, and they add to the evidence justifying the call. 

This post is up at Seeking Alpha.

My base case remains slowdown vs. recession. But I see a slowdown becoming more entrenched as the year goes on, and government policy missteps (good thing we have a competent Administration, so we won’t see any of those! /s) could easily tip us into contraction. If we do go that route, it probably won’t be led by the producer side of the economy, but rather by stretched budgets on the consumer side.

Tuesday, March 12, 2019

Real wage growth continued to improve in February

 - by New Deal democrat.     

Now that we have February’s CPI (up +0.2%), let’s update nominal and real wage growth.

First, here is a graph of nominal wage growth YoY vs. consumer inflation YoY since the beginning of this expansion almost 10 years ago:

First of all, why do I bother with nominal wages? Because employers don’t give out inflation-adjusted salary and wage increases. If they give you a 3% raise, it’s a 3% raise regardless of what happens to inflation. And the long term picture is that nominal wage growth decelerates coming out of recessions until unemployment (or, more likely, underemployment) falls to the point where employees gain a little bargaining power:

To return to the first graph, nominal wage growth has been improving YoY since late 2012. Meanwhile CPI has been meandering around a 2% YoY average, depending on what has been happening with gas prices. Since lately these have been stagnant or down YoY, consumer inflation has waned.

As a result, real wages have improved considerably in the past year, to the point where they are now exactly -3% off their peak in the early 1970’s:

But because aggregate payrolls declined in February, according to the employment report, the aggregate pay that non-managerial workers took home, in real terms, declined by -0.4% in February. In real terms, this amount has increased by 28.2%, down from an increase of 28.6%, more than they earned at the worst point after the Great Recession in October 2009:

Neverthelss, real wage growth in general continued to be good news. Be aware, however, that real wage growth is a long *lagging* indicator, that starts up well after a recession bottoms, and can continue even into the next recession.

Monday, March 11, 2019

Negative Nov. and Dec. revisions overwhelm positive January retail sales

 - by New Deal democrat

The initial spin on this morning’s delayed retail sales report for January has been positive, with for example the Wall Street Journal calling it a “rebound” and “a sign of solid economic momentum in the first quarter.

Ummmmm, No.

Both nominally and in real terms, retails sales did improve by +0.2% in January over December.

The problem is, both November and December were revised downward. In particular, December’s initially reported poor -1.2% showing got even worse, to -1.6% nominally. In other words, for the two months combined, retail sales even measured nominally declined by -0.2%.

Here’s what they look like in real terms through January:  

Because real retail sales tend to lead employment (red in the graph below) with a variable lag on the order of 6-9 months, this downturn in retail sales is more evidence that February’s poor employment report should not simply be dismissed as an outlier:

On a YoY basis, real retail sales peaked over a year ago. They have sharply decelerated since then all the way to roughly zero. We should expect employment gains to also decelerate, and February’s poor report is consistent with such a deceleration having started.

I expect to put up a more detailed look at Seeking Alpha, probably tomorrow. Once it is up, I will link to it here.

Sunday, March 10, 2019

A modest proposal to use FICA-style tax withholding as a transition to “Medicare for All”

 - by New Deal democrat

Probably the foremost reform advanced by the Democratic Party at present is “Medicare for All.” Personally I don’t particularly care whether it is ultimately necessary to have single payer (like Canada) or universal coverage (like France or Germany) or a hybrid of each (like Australia). I am fond of the Japanese saying that translates as “There are many paths to the top of Mount Fuji,” but let’s set that aside for now.

What is generally acknowledged is the problem of how to create a “bridge” between the hodge-lodge of government and employer-based coverages we have now to whatever is ultimately passed as “Medicare for All.” That’s because there will understandably be a lot of blowback if people “lose” an employer healthcare plan, or else get hit with a new tax.

I propose that a system of payroll tax withholding that includes Obamacare and “Medicare for All” plans in addition to employer-provided medical benefits will work. Specifically, I propose three tweaks to Obamacare as it existed in 2016:

       1. Two new spaces for mandatory FICA-style tax withholding spaces are added to each paycheck. One is for “Medicare for All” employment coverage, and the second is for “Medicare for All” unemployment coverage.   

     2.  The individual mandate penalty that the GOP killed in 2018 remains dead. But it is replaced, in all cases where an individual is not covered by employer-provided coverage, with an automatic payroll deduction for individual enrollment that defaults to the least expensive monthly bronze plan for individuals under 40, and the least expensive monthly silver plan for individuals age 40 through 64. This would kick in only for new employees in the first two years, after which it would apply to all employees.

     3. Employers could voluntarily purchase, on behalf of their employees, coverages that are at least at the mandated levels set forth in #2 above.

Here’s how it would work. Let’s start with two specimen paychecks. The first is from New York State. The second is for a state that does not have Medicaid expansion or mandatory unemployment withholding.

Note that, as required by law, all employers must withhold Social Security and Medicare taxes (FICA). Each of the two specimen paychecks above has specific boxes for that FICA withholding. By contrast, Medicaid is not funded by payroll taxes, but is a direct government responsibility. Additionally, the employer *may* also withhold taxes for, e.g., the employer’s medical plan, and state unemployment insurance, as we see in the first of the two specimen paychecks above.

As indicated in #1 above, I propose that two more boxes for mandatory withholding would be added to all paychecks. Call them MFA1 for medical coverage while employed, and MFA2 for medical coverage during periods of unemployment. 
Most importantly, note that FOR MOST PEOPLE BOTH NUMBERS WOULD BE ZERO! Specifically, both “MFA1 and MFA2” would be zero if the employer provides health coverage, and is subject to COBRA. 

But if the employer does *not* provide coverage, then, just like when you start a job you tell your employer how many standard tax deductions to withhold, a person with an Obamacare policy would have that amount withheld and either automatically sent to their provider, or a second check made out by the employer to the provider. If an employee d oes not have Obamacare, and does not select a provider, then the MFA1 withholding would pay the default low cost bronze or silver Obamacare provider, depending on the employee’s age, as set forth in #2 above.

Further, an employer who is not currently providing coverage, or wants to end their own program and switch to an Obamacare plan, could automatically enroll all employees in such a plan, provided the Obamacare plan is at least at the equivalent level of the employer’s current plan. I envision this provision might be temporary, e.g., in effect for only 5 or 10 years by which time I suspect most employers will be out of the employer-sponsored healthcare business.

“MFA2” would be meant to fund Obamacare insurance coverage for those who are not employed and are not covered by  SCHIP, VA coverage, or a state-sponsored Medicaid  or unemployment plan (Hence the difference between the two paychecks). I anticipate that this would be a small universe of people. Just as a back of the envelope guess, let’s peg that at 5% of the total. In other words, it anticipates that for all people as an average, maybe for 2 of 40 working years between 25 and 65, that average  person would need such coverage. If the average Obamacare premium were, let’s say $400 per month, 5% would be an MFA2 amount of $20. Again, in a state where Medicaid or other plan covers this, THE AMOUNT  OF MFA2 TAX WITHHOLDING WOULD BE ZERO. IT WOULD ALSO BE ZERO IF THE PERSON HAS AN EMPLOYER PLAN, IN WHICH CASE COBRA APPLIES.

Finally, I envision the plan being phased in for new employees for 2 years. That’s because there is a lot of job turnover. Many if not most people who do not have employer healthcare coverage, nor existing Obamacare policies, are likely to start a new job during that period. Thus, they’re never going to notice a decrease in take-home pay in an existing paycheck, because it won’t happen! It is simply going to be part of the standard deductions in the paycheck they receive from a new job.

In summary, under my for a FICA-based “bridge” to “Medicare for All”:
  • ALL medical coverage for workers, whether provided by the employer or by Obamacare or “Medicare for All”, would be paid for by mandatory withholding taxes in paychecks.
  •  a person who has an existing employer healthcare plan won’t have to give up their plan. They will also pay no new taxes. 
  •  A person who presently is covered by Obamacare or some other government plan individually likewise won’t have to give up their plan. At most their premiums will be paid directly out of their paycheck vs. having to pay individually out of their take home pay, and they will have to pay the “MFA2” withholding. But they won’t even notice that if they get a new job within the first two years. 
  • Nobody on any existing other government plan is affected. And EVERYBODY is covered, including those who don’t qualify for any other plan including existing Obamacare — that’s what “MFA2” withholding is for. At worst if they started out adulthood with no coverage, and had no job, so that they had never paid for “MFA2” coverage before, there might be a lien or surcharge on their “MFA2” withholding once  they started their first job.
  • in combination with all existing private and public plans, this proposal provides universal health care coverage.

Submitted for your consideration.