Tuesday Evening Miscellany

[Note to self: "Miscellany" would sound better in conjunction with Monday.]

On the second Tuesday of every month, the National Federation of Independent Business (NFIB) puts out its Small Business Economic Trends Report (SBET). The NFIB tells me that they've got about 350,000 member small businesses nationwide. The report is always interesting, and often contains some suprises.

Here are some nuggest mined out of this month's report:

Among the questions asked of small business owners, one deals with the "single biggest problem." The choices are:

Inflation
Taxes
Interest Rates
Regulations
Poor Sales
Competition w/ Big Business
Labor Quality
Labor Costs
Insurance

Interestingly, despite President Tax-and-Spend Obama's presence in the White House, fear of higher taxes is not a major current concern for small business owners:

What IS a huge concern for small business owners is the outlook for sales:

The fear of a poor sales outlook is near a record high. This is testimony, in my opinion, to our new era of consumer frugality and the fear it's instilled in businesses both large and small. I would also note that I found it quite interesting that even after Circuit City declared bankruptcy and went belly-up, Best Buy still reported a sub-par quarter last week (with the stock going down the day of the report). What's the message there, my friends?

Also in the NFIB's SBET is a question about hiring intentions. That appears to be a good news/bad news scenario: The good news is that the reading has bounced off an all-time low. The bad news is that it's still pretty much in record low territory:

While on the subject of jobs, let's put some perspective on the current nonfarm payroll (NFP) situation in the context of the previous nine recessions. We've now lost seven million jobs since the December 2007 peak in NFP, more than twice what we lost in the 2001 recession, which led to a "jobless recovery."

To those who would quibble and say different eras should be looked at in percentage terms, well, let's have at it:

I dearly hope that NDD is right that we'll soon begin adding jobs (though I am personally not optimistic). There is so much pain and slack in the labor market that we need to get some job creation asap.

Today's Markets

Although the SPYs were up .64%, it's hard to count this as anything other than a waiting on the Fed day. Notice that prices -- after rising -- remained at or around the same Fibonacci level for most of the trading day. Bottom line, the market is waiting for tomorrow's announcement from the Fed.

FHFA Price Index Increases

From Marketwatch:

The market value of U.S. homes rose by a seasonally adjusted 0.3% in July compared with June, the third monthly increase this year, the Federal Housing Finance Agency reported Tuesday.

Prices for the latest month fell 4.2% compared with July 2008 and were down 10.5% from the peak in April 2007, the FHFA's statistics showed. Prices in July were at the same level as March 2005 and are essentially unchanged since January. Read the full report.

June's price increase was revised to a 0.1% gain, down from 0.5% previously reported.

Let's take a look at the data.


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The above chart is of the month over month percentage change in housing prices. Notice that we've had 5 monthly increases this year (the Marketwatch story has 3).


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The longer term chart shows that prices have stabilized. Here is a chart of the numerical values in the above chart:



Prices have been fluctuating in the 199.1 to 201.6 range since last November.

Bottom line: the month over month numbers tell as that housing prices are starting to stabilize as well.

Leading Economic Indicators Increase Again

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From the WSJ:

The index of leading indicators rose for the fifth consecutive month in August, offering yet another sign of a recovering U.S. economy.

The leading index increased 0.6% last month, after a revised 0.9% gain in July, the Conference Board reported Monday. July's gain was originally reported as 0.6%.

These numbers are incredibly strong and indicate the recession is over and growth will start soon.

When will the Economy Start to add Jobs? (V.) Putting the Indicators Together

- by New Deal democrat

This is the Fifth of (da**it!) Seven articles exploring leading indicators for job growth in the economy. So far I have examined:

(1) initial jobless claims, which have until now been declining gradually, and which at their trend rate must decline at least 3 more months before they would get to the point where jobs would be created;

(2) the ISM manufacturing employment data, which is very strong and suggests the jobs could be added to the economy next month, and even possibly now;

(3) Industrial Production, which even moreso than ISM manufacturing, is suggesting that job growth could happen imminently - but has a very short lead time;

(4) duration of Unemployment, which appears to be of only limited value, to confirm a payroll reading afterward; and

(5) Real retail sales, describing it as the counter-intuitive "Holy Grail" of reliable leading indicators for job growth.

In this part, I want to put together Real retail sales with the other indicators to begin to form a picture of the most likely month(s) at which the economy will start to add jobs

Of the Leading Indicators above, Real retail sales turns first, 5 months from its low, or 3 1/2 months from its smoothed low, on average. Short of the 23 month 2003 outlier, the longest lead time since World War 2 has been 9 months.

Real Retail Sales and Initial Jobless Claims

Which comes next? The answer is, Initial Jobless Claims. Here are graphs of Real Retail sales (in blue) and Initial jobless claims (in green), first for the 1970s recessions:

and here are the 1991 and 2001 "jobless recoveries":

and finally our own recession/incipient recovery:

As is apparent on the graphs, Initial Jobless Claims turn north on average 1-2 months after Real retail sales. Thus they serve as a reliable confirmation that the turn has been made. Also, because they are reported weekly, they can give first notice of the trend of Real Retail sales.

Additionally, as you can see in particular from the last graph, even mid-sized moves within a trend by Real retail sales are usually mimicked by the next month's Initial Jobless Claims -- see for example the late 2005 spike due to Katrina, and a similar, smaller spike in January of this year. Since Real retail sales soared in August due in large part to "cash for clunkers", it should be no surprise that Initial Jobless claims have fallen in each of the last two weeks, and may well continue to do so for several more.

Real Retail Sales and Industrial Production

In all recoveries except for 1949 and 2002, both Real Retail Sales and Industrial Production were growing together, and Job growth started within 2 months of both moving up.

In 1949, however, even though Real Retail Sales grew at a very slight rate throughout the recession, Industrial Production declined. Once both started to grow again, so did Jobs within several months thereafter:



And in 2002, at first Real Retail Sales grew, but Industrial Production did not. Then Industrial Production grew, but Real Retail Sales did not. As soon as both started to grow together, Jobs finally started to increase:



Now, here is our recession and incipient recovery. Real Retail Sales did not meaningfully grow until August. As per prior recessions, Job losses are converging slightly below 0 during this period of sideways movement. Industrial Production started to grow in July.

Thus, should both Real Retail Sales and Industrial Production continue to advance off the bottom, we should expect jobs to be added quickly, within several months.

Putting together the order of Leading Indicators for job growth, we get:

(1) Real retail sales bottom and turn.

(2) Initial Jobless claims turn.

(3) The ISM manufacturing index turns above 50, i.e., signals actual growth.

(4) Industrial Production turns.

(5) ISM manufacturing index is above 53, ISM employment is at -5 or above, initial jobless claims are at least a sustained 16%-20% off peak, and both Industrial Production and Real retail sales have advanced at a rate of 2.5% or more year-over-year from the bottom.

Items (1) through (4) have already happened. ISM and Real retail are on the cusp of their final signals, meaning job growth could occur as early as October. Industrial production is growing, but not quite at a 2.5% annual rate yet. And initial jobless claims are still only 15% or so off peak, dropping so slowly that it would take at least 3 more months at the current rate for jobless claims to be consistent with job growth.

Recall that I have discussed the strength of past moves, in Real retail sales:

and in Industrial Production:

So, we still have the question, is the upward move strong enough to push the indicators over the final threshold, meaning that job growth has begun?

To add the final parameter, we need to return to Leading vs. Coincident Economic Indicators. That -- and I promise, an actual conclusion -- next in this series. In the meantime, I'm going to post a side note about the 1949 and 2001 recessions, and why I think the recovery won't look like the recovery in 2002-3.

Treasury Tuesday's

Let's look at the Treasury market from several time perspectives.



On the six month chart, notice that prices are consolidating in a triangle formation and have been doing this for almost 4 months. From the larger perspective, treasuries are caught between two trends. The first is a return to risk based assets that means investors are selling Treasuries and moving into higher yielding riskier assets. At the same time, investors are turning more conservative in their orientation to the markets as profiled in this week's Barron's:

Following the series of shocks that started nearly two years ago -- from a 30% decline in the Dow to the collapse of Bear Stearns, Lehman Brothers and AIG to the revelations about Bernard Madoff's $65 billion Ponzi scheme -- individual investors have changed. They've understandably grown cautious, as was evident again last week when new data showed mutual-fund investors put an estimated $43 billion into bonds and withdrew $1.7 billion in stocks in August, even as the Dow was charging from its March low of 6,547 on its way to last week's 9,820. Cash now stands at $3.5 trillion, above where it stood at the height of the financial crisis.

The three month view shows that prices are at the top end of a range within their consolidation pattern. Notice there's a lot of supply in the lower 92 price handle -- meaning when prices get to that level someone (or a group of investors) puts a ton of stock on the market.



The one month chart shows further consolidation in a smaller triangle at the top of the trading range. Also note that prices are using the 50 day EMA for technical support right now.

Today's Markets

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The markets opened lower, rose and then ran into resistance at the 200 minute EMA.

What I wanted to show was how important Fibonacci numbers are. Notice there are three sets of Fibonacci numbers in the above 10 day chart. The first is from the bottom on the 8th to the top on the 17th. The second is from the bottom on the 14th to the top on the 17th. The third is from the top on the 17th to the bottom on the 18th. I drew a box around areas where certain Fibonacci numbers were important for certain price action. Just look at how much space is taken up with the price action. That's how important Fibonacci numbers are.

Extend the First-Time Honebuyer Tax Credit

From Bloomberg:

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Let's look at the economic data.

First, the economy has yet to print a positive GDP report in the last 4 quarters. While all the indicators tell us we're probably going to print one within the next few, we still need all the help we can get to keep the number positive. That means anything that encourages consumers to spend will help -- and the first-time home buyer credit is clearly helping.


Existing home sales have bottomed out. Notice the annual pace of sales has printed between 5.5 and 6 million over the last two years. However, this number needs help to continue its increase and deplete the large inventory overhang.


New home sales have bottomed at the beginning of this year. They've risen since then, but like existing home sales still need help.

As for the Fed's program stopping it probably won't kill the market.



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Above is a chart for the mortgage-backed bond market's ETF. Notice that even during the height of the housing crisis the market didn't crash. Also note that credit markets have settled down over the last year.



The A2P2 spread has come down to far more normal levels.

In other words, the credit markets are working far more normally right now so withdrawing the Fed's program shouldn't kill the revival. In addition, this would be a good time for the Fed to start testing its exit strategy.

Getting it wrong about Initial Jobless Claims and Nonfarm Payrolls

- by New Deal democrat

Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a "note to self" that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this "Great Recession." This "note to self" was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser. It is well on its way to becoming Holy Writ.


Let me say first of all that I have the highest respect for all 3 of the above gentlemen. Nevertheless...

IT IS WRONG.

The 1991 and 2001 recessions were very mild. Peak initial jobless claims in those recessions were 501,250 and 489,250, respectively. It would be nuts to think that jobs would be added to the economy anywhere near the 500,000 high water mark in jobless claims from those recessions.

The 1973-4 and 1981-2 recessions are much better comparisons. They were the two most severe post-WW2 recessions up until now, respectively featuring 9% and 10%+ unemployment. Furthermore, peak initial jobless claims in those recessions were 560,750 on February 1, 1975 and 674,250 on October 9, 1982, respectively; both peaks being much closer to our recession's peak initial claims number of 658,750 on April 4, 2009.

In the case of the recoveries from both of those recessions, payrolls started to grow as the ievel of initial jobless claims crossed 500,000, not 400,000.

Here it is in graph form, including initial jobless claims (in blue and green respectively) ending as of the week each crossed below 500,000, together with nonfarm payrolls (in red and orange) ending the same month:

It is easy to see that nonfarm payrolls troughed in the preceding month, and grew during that month that initial claims crossed below 500,000.

Here is the raw data from the St. Louis Fred site:

1975 Recovery

Initial jobless claims:

1975-02-01 560750 (peak)

1975-04-05 543250
1975-04-12 540500
1975-04-19 535750
1975-04-26 525250
1975-05-03 517250
1975-05-10 514000
1975-05-17 509750
1975-05-24 504750
1975-05-31 497250

and Nonfarm Payrolls:

1975-01-01 77297
1975-02-01 76919
1975-03-01 76649
1975-04-01 76463
1975-05-01 76623
1975-06-01 76519
1975-07-01 76768
1975-08-01 77154

1982-3 Recovery

Initial Jobless claims

1982-10-09 674250 (peak)

1982-12-04 586250
1982-12-11 569750
1982-12-18 554500
1982-12-25 523750
1983-01-01 518000
1983-01-08 512250
1983-01-15 503000
1983-01-22 500500
1983-01-29 492750

and Nonfarm Payrolls:

1982-10-01 88894
1982-11-01 88770
1982-12-01 88756
1983-01-01 88981
1983-02-01 88903
1983-03-01 89076

For good measure, in the 1980 Recession, in which unemployment peaked at 7.8%, jobs showed growth in August 1980 at the same time as Initial Claims averaged 546,000:

Initial Claims:

1980-06-07 629000 (peak)

1980-07-05 599250
1980-07-12 584500
1980-07-19 576500
1980-07-26 559250
1980-08-02 556750
1980-08-09 556750
1980-08-16 546250
1980-08-23 534750
1980-08-30 518000

Nonfarm Payrolls:

1980-05-01 90415
1980-06-01 90095
1980-07-01 89832
1980-08-01 90092


IT IS SIMPLY NOT TRUE THAT INITIAL JOBLESS CLAIMS MUST DECLINE TO 400,000 BEFORE NONFARM PAYROLLS TURN POSITIVE.

Note that for all three Recessions/recoveries, I've included jobless claims from the previous month, when nonfarm payrolls troughed. In 1975, payrolls actually troughed at 536,000 new jobless claims. In 1980, they troughed at 580,000. In 1982, they troughed at 559,000 (the 4 week average of the months involved).

That is partly why I have taken the position that in this recession/recovery, payrolls will trough once there is a sustained reading of ~530,000 if there is a slow decline in initial claims, and 500,000 if the decline quickens.

I am utterly confident that there will be job growth long before jobless claims fall to 400,000.

Market Mondays

First of all, I'm back. Mr$. Bonddad and I had a wonderful vacation. We took a cruise to Alaska we were supposed to take last year that was postponed because of Hurricane Ike. I've got a ton of pictures to go through (and I mean a ton) which I'll be posting over the next few weeks.

Also, I wanted to thank New Deal Democrat and Invictus for their very thoughtful and well-researched postings. It's great having such high quality co-bloggers.

So, let's get down to work and take a look at last week's SPY charts.



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The main trend last week was a strong uptrend that started on Monday morning and continued until Friday morning. Along the way prices used various EMAs as technical support. Notice that on Wednesday afternoon and Thursday morning the MACD printed decreasing peaks while prices increased. This is the kind of divergence that traders look to as possible warnings signs of an upcoming market correction which eventually came on Friday.

The underlying reason for the rally was a string of good economic reports that further indicated the economy is coming out of or is formally out of the recession. I'll get to these throughout today.



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The daily chart is still printing a strong rally formation. Notice that prices are above all the EMAs, the shorter EMAs are above the longer EMAs and all the EMAs are rising. Last week prices moved through key resistance levels. However, the MACD has been in a divergence from prices since the beginning of August. Keeping the market from moving significantly lower has been a string of good economic reports. Instead, we've seen prices spend August consolidating in sideways action. However, the MACD gave us a buy signal last week.

Bottom line -- the technicals are good.

Skunk at the Picnic!

Before we go any further, how about we all give a big round of applause to New Deal Democrat for rockin’ the house during Bonddad’s absence. He did yeoman’s work this week, particularly in view of the fact that I did, quite literally, nothing at all to help him. And for that I am sorry, but business before pleasure, as it were, and this happened to be a busy week with something going on just about every night.

Second point of order: I hate Blogger. There, I said it.

Okay, having gotten that out of the way, on to some data.

I’d be a fool not to acknowledge that most of the recent economic releases have been better than expected, particularly as relates to the most of the headline numbers. However, I’m still not sold on the sustainability, and in some cases I don’t necessarily like what I see lurking beneath the surface. I continue to believe that when it comes time for the government to hand-off the spending baton to the American consumer, the transition might not go as smoothly as everyone seems to think it will.

One of the favorite ratios I like to pull out of the Fed’s quarterly Flow of Funds report (released on the 17th) is the debt-to-income ratio of U.S. households.


Here’s what that looks like (click for larger images):



Our liabilities are currently just over $14 trillion while our income is just shy of $11 trillion; we’re at 129% debt-to-income, to be precise. The good news is that we’re down from 136% in the first quarter of 2008. The bad news is that to get to “trend,” or about 114%, we need to shed another $1.6 trillion, and a reversion to the mean, 77%, implies retiring about $5.7 trillion. Consider that in six quarters we’ve only paid down $350 or so billion and you can see this will be a long slog.

Complicating the problem is that the denominator in the chart above – Personal Disposable Income – is negative year over year for the first time in the history of the series:


The good news out of the Flow of Funds report was that Americans’ net worth went up in the quarter by $2 trillion, from about $51 trillion to about $53 trillion. The bad news is that we’re still down about $12 trillion from our $65 trillion dollar peak. Other good news was that real estate owners’ equity rose a bit, from about series low 41% to 43% -- but that number has a long way to go on the upside to be where it belongs.

We know the consumer is still overleveraged. We also know that the consumer has, for several years, represented about 71% of our GDP through Personal Consumption Expenditures (PCE), or about $10 trillion dollars of our $14 trillion dollar economy. If the consumer were to pull back to the mean, say about 65% of GDP, that would imply a spending cutback of about $850 billion dollars. Some of that will no doubt be offset by the stimulus money, some no doubt by exports, some by inventory restocking. But it’s a big number nonetheless.

On other topics, BLS released state-by-state unemployment numbers last week, and it didn’t look too pretty: 27 states saw continued increases, with California hitting a record 12% and Michigan topping 15%.

I’d posted elsewhere about how the 55+ age cohort is crowding out younger job-seekers, and I really don’t like the look of charts like this one:




A chart like the one above leads in large part to one like the one below, where one might reasonably conclude that older workers are squeezing younger workers out of the workforce or, more accurately, probably preventing them from entering in the first place:




The stock market has, of course, shrugged off any notion whatsoever of double dippage and rallied along its merry way to a 60% or so gain off the March lows. I’d be lying if I didn’t say I think the market is now priced for perfection – through 2011 or thereabouts. But I learned the one key equation I needed to know early on in my career: Intellectually right + losing money = wrong. So I continue to look for signs of a top while simultaneously hoping that the economic fundamentals catch up to where the market thinks they are (or should be).


Lastly, I would note that 86% of Americans recently polled believe the country is still in recession. This is the point that many are trying to get across: While the country may have already "technically" exited recession -- or may be on the very cusp of doing so -- it is going to matter very little to the vast majority of Americans.

More thoughts on the Flow of Funds and perhaps some other stream of consciousness as time allows, which, regrettably, it rarely does.

Another Weekend Beckons

It's time again to put aside work and enjoy your weekend. The markets look like they are going to put in yet another good week, and possibly in a couple of weeks, actually be higher year over year, frustrating all of the people who have been calling for a "crash."

I hope I have kept you informed and engaged this week. My series on leading indicators for job growth will conclude next week.

And finally -- Bonddad will return on Monday.

When Will the Economy start to add Jobs? (IV.) The "Holy Grail" of Leading Indicators

- by New Deal democrat

This is the Fourth of (now) Six posts exploring leading indicators for job growth in the economy. So far I have examined:

(1) initial jobless claims, which have until now been declining gradually, and which at their trend rate must decline at least 3 more months before they would get to the point where jobs would be created;
(2) the ISM manufacturing employment data, which is very strong and suggests the jobs could be added to the economy next month, and even possibly now;
(3) Industrial Production, which even moreso than ISM manufacturing, is suggesting that job growth could happen imminently - but has a very short lead time; and
(4) duration of Unemployment, which appears to be of only limited value, to confirm a payroll reading afterward.

But today, I'm going to talk about "the Holy Grail", that leading indicator which generally and reliably gives advance notice of when job growth will occur. It is exactly counterintuitive, and I found it while looking for an series I thought would be most likely to show that job growth isn't anywhere close to happening.

We like to think that jobs must lead consumer spending. For example, Barry Ritholtz's Big Picture blog featured a cartoon based on that very idea within the last week. It is a commonplace to read on economics blogs that, because there is no job growth, consumer spending will continue to suffer. In fact, 60 years of data shows exactly the reverese! It is real retail sales which lead the creation or loss of jobs some months into the future. It is a consistent relationship with almost no exceptions. And it is a significantly leading indicator. So I am going to show you the entire series via graphs:

Here is the postwar period from 1948 through 1962. With the sole exception of the 1961 recession, Real retail sales (the blue line) consistently peaks and troughs ahead of payrolls (the red line):



as it does during the 1970s recessions:



as it does during the 1991 and 2001 recessions and "jobless recoveries":



as it has done now:



In addition to the 1961 recession, the only other two times in which Real retail sales did not lead were the 1948 peak and the 1970 trough.

In fact, real retail sales has over the last 60 years peaked a median +5 months ahead of jobs, with the following variance: (-4, -3, 0, +1, +4, +5, +5, +11, +14, +16, +17).

It has also troughed a median +5 months ahead of jobs, with the following variance: (-2, 0, +2, +3, +4, +6, +6, +7, +9, +23). Note that the bottoms are more regular and close in time than the peaks -- peaks tend to be long sprawling affairs whereas most bottoms have been "v" shaped. I will discuss the outlier -- the 2002-3 recovery -- in some detail in part Five.

Because real retail series is a "noisy" series, it helps to smooth the data over 3 months. But doing so only moves all but one of the peaks and two of the troughs a grand total of 1 month, and the median lead time for peaks remains the same at +5. The median lead time at troughs becomes even tighter, shortening to +3.5 months.

As it happens, our own episode is one of the two episodes where smoothing the real retail sales data moves the trough, from December 2008 to April 2009. Here is the graph showing that difference, courtesy of Economagic:



What separates the cluster of entries nearer the median from the outliers is, as with Industrial Production, the strength of the move. Flat moves in real retail sales generate a lot of noise, and a longer period between the turn in sales and payrolls. Strong moves in sales generate reliable subsequent moves in payrolls within 8 months after the turn. In general, with regard to recoveries, an increase of about +2.5% a year is necessary to reliably generate a subsequent move in real retail sales.


[note that the above graph does not include this past week's 2%+ growth in real retail sales, which gives ~2.5% growth.]

This was even true of the 2002-3 "jobless recovery." When real retail sales briefly grew at about 2.5% in the first six months of 2002, in July 2002 for the first time, the economy added jobs. When real retail sales thereafter stalled again, jobs were slowly lost again.

Translating that into our recession/recovery so far, an increase from the 3-month average bottom at $159.4 million, means a move to $163.4 million. As of August's number, reported on Tuesday, the three month average is $160.9 million, a gain of 0.9%, not nearly enough of an increase yet to generate a positive jobs number.

There is much more that can be done by using Real Retail Sales as "the Holy Grail." In part Five I will discuss how it can be used in conjunction witht the other series already described to better pinpoint when job growth is likely to occur. Finally, in Part Six, I will show how it can be used to forecast the peak in Unemployment.

Jobless claims, Housing starts, Philly Fed

- by New Deal democrat

The economic news this week has been relentlessly better, and today's news continues the streak.

Jobless claims, at 545,000, can't exactly be called "good," but it is the first time, leaving aside the July anomaly compromised by auto plant closures, that claims have been under 550,000. The 4-week moving average went down to 563,000, again the lowest save one week in July.

In terms of the extent to which this will be a "jobless recovery," the very slow decline in the 4 week average is inconsistent with a positive number, or even a number better than -100,000, when September employment is reported (the model by Michael Duecker applying Prof. Hamilton's research doesn't look like it's going to hold up so well, at least this month).

Housing starts and permits were also up. Since housing is the leading indicator of the consumer economy, its continued improvement is a welcome sign. As I pointed out a couple of weeks ago, even in the Great Depression housing bottomed in 1933 and then improved. ~600,000 permits and starts isn't very strong, but they are up over 100,000 from the April low.

Finally, the Philly Fed September reading of 14.1, up from 4.2 in August, is continued expansion and improvement. The only fly in the ointment there is that new orders, while positive, were slightly down from last month. The Philly Fed appears to confirm the Empire State survey and suggests that the ISM manufacturing index may well breach the 54 level when it is reported in 2 weeks.

In short, all of the data this week serves to confirm that the Recovery is underway. How well and how soon it will translate into jobs is still very much in question.

When Will the Economy start to add Jobs? (III.) Industrial Production & duration of Unemployment

This is the Third of probably Five posts exploring leading indicators for job growth in the economy. So far I have examined initial jobless claims, which have until now been declining gradually, and which at their trend rate must decline at least 3 more months before they would get to the point where jobs would be created; and the ISM manufacturing employment data, which is very strong and suggests the jobs could be added to the economy next month, and even possibly now.

In this, the third installment, I'm going to examine Industrial Production, and duration of Unemployment - the first of which gives a very brief leading signal, and the second of which appears to be of only limited value -- before I get to "the Holy Grail" in part IV.

Industrial Production, which was just reported yesterday morning, is probably the single most important marker of the end of recessions. It tends to make a clean "v" in graphs right at the end of recessions. This is not a coincidence since the NBER makes use of it in their determination.

As compared with payrolls, however, industrial production does have a slightly leading characteristic. It tends to peak a median +2 months before payrolls, and to trough at the end of recessions a median +1 month before payrolls. In particular, of the 10 troughs since World War 2, in 8 of them industrial production troughed within 2 months of the payrolls number. For example, here is the graph of the two series for the 1970s recessons:



The most notable exception, of course, was 2002-3, when production troughed a full 20 months before payrolls, as shown here, along with our present recession/recovery:



Without more, at best we can say that the odds are nevertheless quite good, historically, that the trough in jobs will be within 2 months of the trough in industrial production -- which would mean the economy should start to produce actual job growth this month!

Fortunately, there is some further guidance, because the only times that industrial production has led employment growth by a relatively long period of time, it has also shown weak growth -- less than 5% a year. In more typical V shaped job recoveries, it has grown at a rate of 10% or more a year. Here are two graphs, the first showing the rate of industrial production growth in the 1953, 1992, 2002, and present recoveries two months after their trough:



and here is the same graph extended one year for the prior three recoveries:



As of today, industrial production is up 1.8% in the last two months, and looks more like the 1983 V shaped job recovery than the two subsequent "jobless" recoveries. Should it continue to increase at a similar rate in the next month or two, that would correlate very well with past instances of V shaped job recoveries.

Various durations of unemployment are reported monthly together with payrolls. As I have mentioned before, the shorter the duration, the more it leads; the longer the duration, the more it lags, as shown for example in this graph (first blue, then orange, then green, then red):



An examination of jobs data shows that it always troughs at or after the peak in the 5-14 duration weeks' employment data, but coincident with or slightly before the 15-26 week data, as shown for example here for the 1982 and 1991 recessions:


and here for the 2001 and present recession/recoveries:


Given that the interval between the peaks in the two series can be long, as it was in 2002-3, the series is of very little help. Both durations of unemployment data tend to become very "saw-toothed" as they approach and then recede from their peaks. The biggest pre-peak sawtooth in the 5-14 week data is 10%. Since we have already declined about 18% in that series before the recent upward move, that series has probably already peaked. But we have only declined about 7.5% from the peak in the 15-26 month data, which in the past has had a pre-peak sawtooth of 15%. At best, if we get a drop of more than 15% in that data, it might give us one month's lead on the trough in the jobs data.

Tomorrow (hopefully), I will discuss "the Holy Grail", the data series which almost infallibly gives a significant and relatively constant lead time for peaks and troughs in jobless claims, and also reliably indicates peaks in unemployment as well.

Another forecasting model for Job creation

- by New Deal democrat

Prof. James Hamilton of Econbrowser has put up a guest post by Michael Dueker, who is using an econometric business cycle model based on research published by Prof. Hamilton. The model's last prediction of the length and job losses during the Recession, in December 2008, "Current business cycle forecasts see a July or August 2009 trough and a jobless recovery until March 2010", proved uncannily accurate in forecasting the end date of the Recession, and included this graph of projected payroll losses in 2009 and beyond:


The only difference between that graph and what really happened was that February was worse than forecast, and May and June got reversed. The forecast even closely mimicked the actual 216,000 losses in August! Here's Bonddad's graph of what actually happened:



I encourage your to click through to Econbrowser and read the entire December 2008 article. Why? Because here is the updated projection of the jobs graph in the article posted Monday:



Your eyes are not deceiving you. The updated forecast calls for miniscule job losses this month, and actual growth of almost 100,000 jobs in October.

So far this year, business cycle models have been spot on, producing results diametrically opposed to the almost uniformly bearish "fundamental analysis" in the econoblogosphere.

But even I have problems going as far as Duecker. As I understand it, basically Hamilton's model considers recesssions/recoveries like an "on/off" switch for interpreting data. Depending on which you are in, you get different results. At least we won't have to wait long to see how accurate Duecker's prediction is. Per my prior posts, we would need a very quick drop of jobless claims to 500,000 or under in the next few weeks to coincide with the flat payroll projection Duecker makes for September -- and of course, we get our next installment tomorrow morning.

Industrial Production up +0.8% in August 2009

- by New Deal democrat

The Federal Reserve has reported that Industrial Production rose 0.8% in August. July's number was also revised up 0.4% to 1.0%. April through June were revised lower. Capacity utilization also rose +0.9% to 69.6% (which still means that industrial capacity is unlikely to be fully utilized for a long time to come).

Industrial Production is one of 4 or 5 metrics that are typically used by the NBER to date the end of recessions, and it typically makes a "v" bottom. That appears to have been the case again in this recession, given the +1.8% rise in only two months.

I will be examining the relationship of Industrial Production to jobs tomorrow. Not just the rise, but the strength of the upturn are important. Then, hopefully on Friday, I will start to discuss the "Holy Grail" leading indicator for job growth.

August 2009 CPI

- by New Deal democrat

This morning the BLS reported that consumer inflation rose +0.4%(seasonally adjusted) in August, up +0.2% NSA. While year-over-year prices are still - 1.5% into deflation, this is an increase from last month's bottom of -2.1%.

The deflationary bust of early 2009 unfolded in accord with the optimistic scenario I laid out in January:

In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.

In the Optimistic scenario, monthly inflation remains positive, but perhaps at 1/3 to 1/2 the level of last year. By the end of June, first half 2009 inflation will be in the 1.4%-2.2% range. Year over year, however, as the 2008 numbers are replaced, DEflation will be realized, falling to (-2.0%) - (-2.7%) range....

In the Pessimistic scenario, monthly inflation remains near 0%-1% in the first half, and is firmly negative, though less than 2008 in the second half. By mid-year, YoY DEflation will be somewhere in the (-3%) - (-4.5%) range....

In the pre-World War 2 era of deflationary busts, including the Great Depression, PPI for commodities bottomed and turned around either before or simultaneously with CPI. when YoY CPI bottomed, the bust ended. Such a bottom coincided with increased demand. Here is the consumer and commodity inflation data during the deflationary 1920-1950 era demonstrating this point:

Note that commodities (in red) almost always turned up before the economy as a whole did. Typically CPI (in blue) bottomed on a year-over-year basis at the end of deflationary recessions, including the Great Depression.

By August, YoY commodity deflation, producer deflation, and now consumer inflation have all bottomed, signalling by pre-WW2 metrics of deflationary busts, that global consumer demand has increased, and thus the recession has indeed ended, as Fed Chair Ben Bernanke opined yesterday.

Food inflation has also turned around:

The food index rose 0.1 percent
following a 0.3 percent decline in July. The food at home index,
which fell 0.5 percent in July, was unchanged in August.

Food has declined for 5 of the last 6 months, and is now only up 0.4% YoY.

It is noteworthy that 2 of the 5 coincident indicators known to be used by members of the NBER to date the end of recessions -- real retail sales and industrial production -- have increased, and 2 others -- personal income and aggregate hours work -- appear to have bottomed, consistent with the pre-WW2 deflationary bust scenario outlined above. Only jobs have yet to turn around.

Important News from Bonddad

"Vacation rocks"

In other news, the DJIA closed near 9700 today, nearing the psychologically important 10,000 level. Do you think it will cross 10,000 by the end of this year? Since the markets fell precipitously in the first week of October 2008, do you believe we will have a positive year-over-year DJIA or S&P 500 print by October 10 of this year?

Retail Sales soar in August; Empire State Mfg. soars for September

- by New Deal democrat

Yesterday I noted that retail sales would probably be the most important number reported this week. The Census Bureau just obliged, reporting not only that overall retail sales soared - even above raised expectations due to "cash for clunkers" - by 2.7%! Even ex-autos, retail sales were up 1.1%.

Additionally, the New York Fed's Empire State index rose from 12.08 to 18.88 for September. This report, along with other regional reports, is looked to as a harbinger of the next ISM report. If this region's report is confirmed by those of other regions, it will suggest (per my post just below) that the ISM manufacturing index is going to continue to climb strongly, past the 54 mark that in the past has always coincided with actual job growth.

Finally, separately the Census Bureau reported that the Inventory/Sales ratio, which measures how much slack is in the sales system, declined to 1.36 in July from 1.38 in June. At the depth of the recession, this ratio had risen to 1.46. The Inventory/Sales ratio has recently been falling .02/month, and since this just-released data is 2 months old, the ratio now might actually be 1.32. In the economic expansion earlier this decade, job growth finally occurred when the ratio fell to 1.31 in late 2003, and the ratio varied between 1.24 and 1.31 for the rest of the expansion.

All of these numbers stick a fork in the idea that the recession might still be lingering (subject to confirmation by my co-blogger, Invictus, of course!). Moreover, as I will discuss later this week, the retail sales data is extremely important to a discussion of when the recovery will start to add jobs. In short, the odds of a V-shaped jobs recovery just got considerably better.

When will the Economy start to add Jobs? (II.) More on the ISM, and getting the Manpower index wrong

- by New Deal democrat

This is the second in a series of posts in which I will try to address the question, "When will the recovery add jobs?" In the first post, I looked at new jobless claims and suggested that they must fall to a level of at least 530,000 over a sustained period, or quickly under 500,000 to generate actual job growth. If jobless claims continue to decline at the slow trend of ~17,500/month, that would take another 3 months (at minimum).

In this post I will take a further look at the ISM manfuacturing index, which I have already noted correlates very strongly with job growth and loss, discussing two aspects in detail. As part of doing so, I will argue that the blogosphere overlooked perhaps the most important data in the Manpower hiring index from last week when they emphasized the part that said:

Employers' hiring plans for the upcoming fourth quarter dropped to their lowest level in the history of Manpower's Employment Outlook Survey, which started in 1962. .... Before this year, the survey's previous low point was a net 1% hiring outlook for the third quarter of 1982.

While the blogosphere correctly noted the extremely low levels of employers planning to hire, it failed to note that in the past, the manpower survey has actually lagged employment growth by one quarter, as employers tend to make plans for hiring in the coming quarter by projecting the last quarter into the future, as shown on this graph:


The first of two errors by the blogosphere is that it should have taken note that immediately subsequent to the record low hiring plans of 4Q 1982 came a hiring surge that began in January 1983, as employers quickly needed to catch up. I'll return to the second error later.

In a prior post, I noted that unlike previous recoveries in the 1992 and 2002 recoveries, the ISM manufacturing index never rose above 53.6, in contrast to earlier recoveries where it quickly rose above 55 or even 60. I have prepared a graph that confirms that indeed the level of 53 or above strongly correlates with the economy adding jobs Below that number the economy tends to shed jobs. In the graph, below, the low point for payrolls in each of the last 3 recessions (shown in red, green, and orange, respectively) is normed to 100. A reading of 103, for example, means 3 percent growth in payrolls from that low point. The ISM index is normed so that it crosses the 100 threshold at a reading of 53:



Note that the 53 level is the point where jobs began to be added in the very strong recovery after 1982, as well as during the week recoveries of 1992 and 2002. As of August, the index had surged to 52.9. Unless the index stalls out at the 53 level for several months, as it did in 2002, it suggests that job growth could begin as early as October, should there be two confirming readings above 53 in a row. Further, to date, a reading over 54 on the index has always coincided with actual job growth.

Another portion of the ISM index deals directly with employment. The employment index compares the percentage of employers planning to hire, lay off, or keep current staffing levels in the next month. A reading above 50 indicates net hiring, and visa versa for a reading below 50. Two items of data in this index stand out very clearly as harbingers of or absolutely coincident with employment growth. First, whenever the hiring vs. firing index is -5 or higher (i.e., no more than 5% more employers plan to fire than hire) and rising, where other evidence indicates a recession is ending, that has always indicated net employment growth was imminent, at least on a temproary basis.

Secondly, whenever current staffing intentions were 65+. and hiring plans were 15+, that has always coincided with positive jobs numbers in the BLS survey, including during and after the "jobless recoveries" of 1992 and 2002. Most typically as a recession ends, first fewer employers plan to lay employees off, and the number intending to keep current staffing levels rises - frequently past 65 to 70 percent. Next the percent intending to hire gradually rises even as the high percent of employers planning no change levels off or declines. In other words, employers tend to hoard plans to actually hire until they are sure that order growth is sustained, and during that interim an extraordinarily high percent will plan no changes. Here is a graph of the 2001 recession and the recovery afterward, showing this typical point:



And here is the current graph:



We just reached the 70 percent no change level in July. In August that dropped to 69, but hiring intentions rose to 13. A shift of merely two percent would give us the 65+/15+ reading that has always coincided with employment growth in the past. The current reading of the index is -6, just one short of the -5 reading that has typically been a harbinger of growth. Again, unless the trend tops out here, job growth would appear to be very close.

And that brings us to the second way in which the blogosphere got the Manpower survey at least partly wrong last week: ignored in the blogosphere was the announcement that the number of employers planning no change in staffing levels reached an all time high:

There was one positive sign in the survey: 69% of employers said they planned no change in their hiring plans, up from 67% in the third quarter and 59% in the fourth quarter a year ago.

In other words, the manpower survey corresponds well to the ISM survey from July. Any unexpected increase in customer demand is going to force these employers to increase plans to hire from their extremely low levels.

In summary, the ISM manufacturing index information argues strongly that, IF present trends continue for even a couple more months, the economy will begin to add jobs.

ECRI: Job Growth by Year's end

- by New Deal democrat

The Economic Cycle Research Institute has made a bold prediction: there will be actual jobs growth in the service sector by the end of the year. Here's what they say:

"The rise in WLI [weekly leading indictors] growth to a record high reinforces our earlier forecast that at least the early stage of the current economic recovery will be more vigorous than the last two," said ECRI Managing Director Lakshman Achuthan.
....
"We expect non-manufacturing employment -- which is where 91 percent of us work -- to be positive by year end," Achuthan said.

"We are talking about recovery that includes jobs growth in the non-manufacturing sector, and we are talking about a recovery that includes increases in consumer spending.

I include this item not just for its contrarian boldness, but also because:

1. ECRI does not sell stocks or bonds. It is only a forecasting service, and has no conflict of interest.

2. ECRI was around during the Great Depression, and its forecasting model includes data from that era.

3. ECRI has been pounding the table bullish on the economy since March, calling for the recession to end by the end of summer, while almost all other pundits were predicting continued free fall at best. Now, most economists do agree that in GDP terms, the recession did indeed probably end this summer.

The Economy This Week

- by New Deal democrat

Welcome back from your weekend! While Bonddad's enjoying himself on vacation this week, we won't leave you uninformed.

There's not much on the economic calendar today, but beginning tomorrow, we get reports on producer and consumer inflation, industrial production, business inventories, housing starts, initial jobless claims, retail sales (which I'll argue may be the most important release of all), and Federal reserve economic surveys in the New York and Philadelphia regions.

I'm not sure what Invictus may have planned, but in addition to the above, I plan to continue my series asking, "When will the economy add jobs?" hopefully beginning later today.