Saturday, December 14, 2019

Weekly Indicators for December 9 - 13 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Every time I am tempted to remove my “recession watch” for this quarter through mid-year 2020, more data shows up that is at very least not inconsistent with a recession having actually started a month or two ago.

To find out what I am talking about, go click over and have a read. As usual, it should be useful for you, and it helps reward me a little bit for my efforts.

Friday, December 13, 2019

November real retail sales show consumption still weakly positive

 - by New Deal democrat

Retail sales are one of my favorite indicators, because in real terms they can tell us so much about the present, near term forecast, and longer term forecast for the economy.

This morning retail sales for November were reported up +0.2%, while October was also revised up +0.1%. Since consumer inflation increased by +0.3%, however, real retail sales were down less than -0.1%. Real retails sales remain slightly below their August peak.

Here is what the longer term absolute trend looks like.   

A closer view shows that the last three months’ decline remains well within the range of noise:

Others may use other deflators. I use overall CPI because:
1. I’ve been doing it this way for over 10 years. 
2. This is the deflator used by FRED.
3. It has a 70+ year history.
4. Over that 70+ year history, it has an excellent record as a short leading indicator for employment and recessions. That’s the kind of track record I like.

Further, although the relationship is noisy, real retail sales measured YoY tend to lead employment (red in the graphs below) by about 4 to 8 months. Here is that relationship over the past 20 years: 

The recent peak in YoY employment gains followed the recent peak in real retail sales by roughly 6 months, and the downturn in real retail sales at the end of last year has already shown up in weakness in the employment numbers this year, as shown in this shorter term view of the past 5 years (note change of scale in payrolls better to show the changes): 

Similarly even with the recent small decline at least stabilization in the  employment numbers by about next spring. 

Finally, real retail sales per capita is a long leading indicator. In particular it has turned down a full year before either of the past two recessions:

In the last 70 years, with the exception of 1973 and 1981 this measure has always turned negative YoY at least shortly before a recession has begun:

Thus this is a quite reliable indicator, and with this result still being up +0.7% YoY, it is not flagging any imminent recession.

To summarize, this is a small decline from a peak three months ago. On the positive side, it is not enough for me to change this indicator to neutral, although it is enough to downgrade it to a weak positive. I will need at very least one more month without making a peak, or a more serious decline, to downgrade this indicator. On the negative side, together with yesterday’s poor weekly jobless claims number, if there is further confirmation, it *could* mark the beginning of the spread of contraction from the manufacturing sector into the consumer sector that I have been worried about.

Thursday, December 12, 2019

Off topic: two solutions to home delivery theft

 - by New Deal democrat

By now we all know that theft of packages delivered to people’s home doorstep is a big problem. Here are pictures of two solutions:

1. Massive 1984-style and easily hackable home monitoring. Or even worse, the ability of the delivery person to open the homeonwer’s garage to leave the package inside.

2. A large 1950’s style milkbox:

For those of you who may not know what I am talking about, the milkbox was built into the side wall of a garage and had doors that could be opened and locked from the inside on each side.

The homeowner unlocked the outside door. When the milk was delivered and the milkman closed the outside door, it would lock from the inside. When the homeowner wanted to retrieve the milk, they opened the inside door.

 Make the box wider to accommodate larger sized packages. Problem solved.

Initial claims turn neutral on seasonality, but no red flag

 - by New Deal democrat

As you know, I’ve been monitoring initial jobless claims closely for the past several months, to see if there are any signs of a slowdown turning into something worse. Simply put, if businesses aren’t laying employees off, those same people are consumers who are going to continue to spend, which is 70% of the total economy. So the lack of any such increase has been the best argument that no recession is imminent.
This morning’s report of 252,000 initial claims is enough to signal a caution, but historically has more often coincided with slowdowns rather than recessions.

To reiterate, my two thresholds for initial claims are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher. 
I’ve also added a threshold for the less leading, but also much less volatile 4 week average of continuing claims at 5% higher YoY.

This week’s reading of 252,000 was the weakest since September of 2017. As a result, the 4 week moving average of claims has risen to 224,000, is 11.2% above the lowest reading of this expansion, which occurred back in April: 

Nevertheless, on a YoY% change basis, the 4 week average is still slightly below, as in by 1,000 or -0.5%, its level one year ago:

For the first two weeks of December (blue in the graph below), the average is 226,000 vs. 223,200 for the entire month of December last year (red), or higher by 1.3%, while on direct comparison with the first two weeks of last December, they are higher by 4.4%:

Both thresholds for concern - extra watchfulness - have been met. 

Meanwhile, the less volatile 4 week average of continuing claims is 0.2% above where it was a year ago:

Here is the longer term graph:

Again, this certainly is cautionary, and is consistent with a significant slowdown. But there have been similar readings in 1967, 1985-6, 3 times in the 1990s, and briefly in 2003 and 2005, all without a recession following. So the threshold for continuing claims being a negative (vs. neutral) has not been met either.
Several weeks ago I wrote that “unless initial claims start to be reported in the 230’s, and continuing claims continue to trend  higher, into the 1.770 million range (by mid-December, after which the YoY comparisons for continuing claims get much easier), no interim recession will be signaled.” Last year we also saw some seasonal weakness in initial claims, even before the government shutdown, so one bad week is not enough reason for a fundamental change of opinion beyond turning neutral. So it will take several more weak weeks of readings in the 230’s or worse for initial claims to raise a red flag.

Wednesday, December 11, 2019

November average real wage growth stable, but aggregate growth now puts expansion in second place behind 1990s

 - by New Deal democrat

November consumer inflation came in at +0.3%. Since in last Friday’s jobs report average hourly earnings also increased +0.3%, real average hourly earnings were unchanged:   

In a longer term perspective, this means that real wages remain at 97.9% of their all time high in January 1973:

Since in November 2018 consumer inflation came in a 0%, the YoY measure of real average wages declined from +2.0% to +1.6%: 

Aggregate hours and payrolls have improved significantly since July, so even though they declined -0.1% in October, real aggregate wages - the total amount of real pay taken home by the middle and working classes - are up 30.4%  from their October 2009 trough at the beginning of this expansion:

As of this month, in terms of total wage growth, this expansion rises to second place, ahead of the 1960s (dated from January 1964 when record-keeping began) but still below the 1990s peak of +33.9%. Nevertheless the *pace* of wage growth has been the slowest except for the 2000s expansion.

This year, 2019, has really been a boon for labor. Labor force participation has increased, undemployment and underemployment have made new lows, and somnolent gas prices combined with accelerating nominal wage growth have meant that real average and aggregate wages have risen strongly. I suspect this will mark the “sweet spot” for average middle and working class Americans from this expansion, as YoY consumer inflation ex-gas has risen back to +2.3% YoY (red in the graph below):   

Should this rising inflation trend continue, along with strong nominal non-managerial wage increases (blue), the Fed is going to want to raise rates again.

Tuesday, December 10, 2019

Live-blogging the Fifteenth Amendment: December 10, 1868

 - by New Deal democrat

In the Senate, the two proposals for a Fifteenth Amendment to the Constitution were referred to the Judiciary Committee.

In the House of Representatives, Rep. James G. Blaine made the following speech (in relevant part):

And now that victory, complete and unsullied, has been won [in the elections of 1868], ... it may not be unprofitable . . . to make a brief summary of the points that have been solemnly adjudicated and permanently settled by the American people in the election of General Grant to the presidency.
.... The election of 1868 is the last in which the lately rebellious section, even if it could be wholly controlled by rebels, will have sufficient power in the electoral vote in the country to make it the object either of hope or fear on the part of political organizations striving for the government of the nation. . . . . The withdrawal of northern Democratic support for these [ten rebel] States will give to the loyal inhabitants, who are a clear majority in each of them, the power of governing them in the interest of loyalty . . . .  The Union was actually saved by General Grant’s actions in the field. The menace of its destruction ceases with his victory at the polls.
[ ] The reconstruction laws of Congress have been vindicated and sustained by General Grant’s election. The State governments created under those laws will be upheld and the basis of impartial loyal suffrage, without regard to race or color, will be accepted as the permanent rule in the lately rebellious States, as it will be at no distant day throughout the entire Union. This result is certain to be achieved either through the amelioration of prejudice and the conquering force of justice in the individual States or by the comprehensive influence of a constitutional amendment which shall affect all the States equally and alike. . . .  The rebellious element in those States, seeing the hopeless folly of longer resisting the mandate of the nation, will acquiesce in the decision, if with no better grace than merely accepting the inevitable. .... The better minds even among the rebel leaders recognize and admit that as a question of practical statesmanship it is too late to discuss negro suffrage; for having been granted it is impossible to recall it. Between originally withholding a franchise from large masses of people and annulling it after it has been conceded, wise men can see a vast difference . . . . So that even excluding from the case the abstract and unchanging element of justice which underlies it, it is demonstrably impracticable to withhold suffrage from the southern negroes now that they have exercised it, without involving consequences which would would destroy all security for life or property in that section for generations to come. Negro suffrage then [has] be[en]  of necessity conceded . . . .
[Source: Congressional Globe, 40th Congress, 3rd Session, pp. 43, 57-58

With the hindsight of 150 years, Congressman Blaine’s triumphalism can be seen as wildly overoptimistic to say the least. But he was hardly alone. The writings of Frederic Douglass at the time have the same triumphal tenor. As it turned out “Negro suffrage” wasn’t conceded at all, as the low level guerrilla insurgency by the KKK and others in the South ultimately wore down northern Republicans, most of whom may have abhorred slavery but did *not* believe in actual racial equality.

Note also, however, that Blaine’s speech completely cuts the feet out from beneath Chief Justice Roberts’ holding in Shelby County that there is some amorphous and inchoate requirement in the Constitution that all States be treated equally. As Blaine pointed out, States undergoing reconstruction were treated far differently than the others, including other slave States, as it was mandatory that their constitutions enshrine black suffrage, whereas, e.g., the loyal slave States of Maryland, Kentucky, and Missouri faced no such obligation.

Previously: December 7, 1868

Scenes from the November jobs report 2: participation and wages

 - by New Deal democrat

Yesterday I looked at the leading sectors of employment from the establishment jobs report. Today let’s look at labor force participation and wage growth.

There was no significant change in either prime age labor force participation or employment from October to November. In the below graph, both November readings are normed to zero so that only better rates of participation and employment show as positives. The graph dates from the end of the 1980s, when women’s entry into the labor force was close to completion:  

The prime age employment to population ratio for prime age workers is better than either the 1990 or 2007 peaks, but about 1.6% lower than the late 1990s boom. But participation still lags all three peaks.

On the other hand, the *YoY growth* in participation for November was +0.5%, among the strongest rates sine the mid-1990s:

Note the huge bulge in the 1960s and 1970s as the baby boom, and women, entered the work force in droves. Some of the strong growth in this metric that has appeared over the past 5 years is the result of the equally large Millennial generation entering the market and offsetting retiring Boomers.
As shown in the next graph below,  YoY wage growth lags YoY participation growth. On a more “micro” scale, large bumps in participation (e.g., the mid-1980s, early 1990s, and 2016) have frequently (not always!) tended to be associated with lags in wage growth, as short term increased competition for employment openings eases wage demand.

But on a cyclical and secular scales, another part of the story of the lag in participation is the deceleration in wage growth. Nominal wage growth is one of the very few *long lagging* indicators, I.e., it does not bottom out until the U6 underemployment rate falls to about 8% (not shown):

In the past 40 years, wage growth has tended to peak in the 4.0%-4.5% range for each expansion. So far non-supervisory wages have increased at most 3.8% YoY in this expansion:

Finally, let’s compare nominal non-supervisory wage growth YoY (blue) with consumer inflation (red):

Both slowdowns and recessions have typically occurred in the past 40 years when inflation is nearly equal to or exceeds nominal wage growth. We briefly had that in 2018, due to an increase in gas prices, but 2019 has been a rare occasion of accelerating nominal wage growth an decreasing inflation (again, due to somnolent gas prices).

[Aside: stories you are reading about how wage growth has subsided are citing wages that include supervisors and managers. The slowdown in growth there has everything to do with managerial employees, and not non-supervisory employees.]

Tomorrow we will get November inflation data. The signs are that gas prices are picking up again, so I expect an uptick in inflation as well.

Monday, December 9, 2019

Scenes from the November jobs report

 - by New Deal democrat

Let’s take a more detailed look at last Friday’s November jobs report, in particular a discussion of the more leading sectors.

First, let’s update the three leading sectors of employment that I have been tracking: temporary help (blue in the graph below), manufacturing (gold), and residential construction (red). Here’s what they look like compared with 2018, showing the slowdown this year (Note: the big decline in manufacturing in October was the GM strike, which as expected was reversed in November):   

Residential construction looks like it has rebounded from its losses earlier this year, more confirmation of the rebound in the long leading housing sector.

As for temporary help, it continues to defy the gloomy weekly statistics that have been worsening this year in the American Staffing Association report. On the other hand, the pattern of downward revisions has persisted. This year there have been almost relentless downward revisions in that number. That pattern was mixed for September and October, as the downward revisions in the first were almost exactly matched by the upward first revision to the latter. Below are the original number for the last four months on the left, followed by the first and then final revisions to the right:

JUL +2200 -7300* -10,500
AUG +15,400 +14,500 +9,500
SEP +10,200 +20,100 +9,900
OCT -8100 +3800*
NOV +4800
*1st revision only

Next, the average manufacturing workweek remains down 0.9 hours per week YoY from its peak. Although I only show data from 1983 onward below, going back 70 years there have only been 2 occasions where such a decline lasted longer than one month without a recession happening (1953 and 1966). In the modern era shown, only in 1985 and 1995 for one month apiece were there 1 hour declines without a recession following. A look at the YoY% change in manufacturing hours for the past 35 years also shows that such losses have *always* led to actual YoY losses in manufacturing jobs:

So, despite the rebound in November, we should expect more and significant actual losses in manufacturing jobs going forward. And, like temporary help, the revisions for manufacturing employment have all been downward for six of the past seven months:

APR +4. +3 (-1)
MAY +3 +2 (-1)
JUN +17 +10 (-7)
JUL +16 +4 (-12)
AUG +3 +2 (-1)
SEP -2  +2  (+4)
OCT -36 -43 (-7)*
NOV +54 
*1st revision only

For the first 11 months of 2019, manufacturing has only added 34,000 jobs.

More broadly,  since January of  this year, only 97,000 jobs have been added in the entire goods-producing sector:

Further,there have been YoY losses in goods-producing jobs before all of the past 3 recessions, and going back 70 years, counting 12 recessions, in all but 3 there has been steep deceleration before and actual losses no later than two months into the recession, with only 2 false positives (1966 and 1985). This is consistent with at very least a severe slowdown.

Where there has not been a slowdown is in the (non-leading) services sector, which remains at roughly 1.5% growth YoY:

To sum up with regard to the leading sectors, Friday’s report was indeed good, but given the revisions, not quite as good as it appeared at first blush.

Finally, I wrote on Friday that the blowout good report negatived recession in the immediate short term. On Saturday Mike Sherlock took issue with many such similar claims

Pointing to the ISM manufacturing slowdown, a slowdown in small firms’ hiring, the manufacturing workweek, and the narrowness of the 2015-16 slowdown, concluding “people ought to discuss the actual data instead of making baseless claims.”

So I thought I would go back and take a look at the actual 70 years of data.

Since Friday’s report showed a m/m gain of 0.175%, I made a two graphs together showing the m/m% gain for the last 80 years, from which I subtracted -0.175%, so that any showing equal to November’s would be at the zero line, and only those showings better than November would be positive.

Here’s what I got:  

The two time periods are significantly different. During the post-war boom through 1974, it wasn’t uncommon at all to have readings equal to or better than November’s right before a recession began. In fact it happened just prior to every recession except for 1955 and 1957. Since 1974, though, it is a different story. Only in 1981, when the Fed raised rates sharply, was there a reading as good as November’s within 3 months of the onset of a recession. Prior to the last two recessions the lag was much, much greater. In either time frame, the three month rolling average was less than 0.175%/month leading up to recession - but of course it is now as well.

So, credit to Mish for raising a fair point. But I think the data from the modern era, where manufacturing is much less a component of the jobs picture is the most applicable. So I still think the November report is strong evidence against a recession before February.

Sunday, December 8, 2019

The endowment effect and the taxation of wealth

 - by New Deal democrat

As you may recall, I am reading the histories of a number of past Republics which have had various levels of success. Without getting too far ahead of myself, it appears that one constant is that, once plutocratic oligarchies are entrenched, they will refuse to yield power or money, even to the point of destroying democratic or republican institutions.  In other words, David Frum‘s observation that "If conservatives become convinced that they can not win democratically, they will not abandon conservatism. They will reject democracy" is true not just at the present, but across history.

I raise this in the context of Elizabeth Warren’s proposal for a “wealth tax.” Leaving aside its practicality or even Constitutionality, the above historical observation is probably at the root of the apoplexy with which plutocrats have reacted against it.

A further context to consider this issue is what psychologists and behavioral economists call “the endowment effect.” The endowment effect describes the consistent result that people would rather retain something that they have acquired - even if by charity, chance, or gift - than earn the  same thing when they do not own it. Put another way, people's maximum willingness to pay to acquire something is typically lower than the least amount they are willing to accept to give it up, even when there is no cause for attachment, or even if the item was only obtained minutes ago, and was not in any way “earned.”

This paradigm is applicable to taxation. Consider payroll tax withholding. Suppose a person’s income tax liability were $10,000. In strictly economic terms, they should be indifferent to paying that lump sum at the end of the tax year, or having it withheld at $385 per biweekly paycheck. But it is almost certain that the former situation would lead to a lot of anger at the end of the year, while the latter once started would be barely noticed. In the former case, the government is trying to take away the “endowed” $10,000, while in the latter case the taxpayer never even receives the money.

A “wealth tax” is like the former situation, and is likely to engender the strongest angry reaction. And it certainly appears to be the case from several thousand years of history that it oligarchs will be willing to trash everything else in order to keep their “endowment.”

Obviously this points to the importance of equitable interception of income before it vests in the recipient, I.e., withholding taxes. But in a case such as the US, where that horse has long ago left the barn, it argues for a recapture that at least minimizes the endowment effect. 

That, I think, is the estate or inheritance tax. I prefer the latter, because it emphasizes the fact that the heir has not “earned” the wealth, vs. the former which has been demogogued as a “death tax.” And it does make a difference. One of the Koch brothers, for example, could leave either $250 to every American household, or $40 Billion to their sole surviving heir. The estate tax would be identical, but the inheritance taxes would be very much different!

By no means am I suggesting that the wealthy would roll over for a robust inheritance tax. But I am suggesting that the reaction would be much less intense than for a “wealth tax.” That means a much better chance of the tax “sticking,” and a much better chance that the wealthy would not destroy our representative democracy to avoid it.