When Will the economy add jobs? December update: Now!

- by New Deal democrat

Back in September, I published a six-part series, "When will the economy start to add jobs?" . The research in that series led me to conclude that it was most probable that the jobs market would bottom and start to add jobs in November or December, +/- 1 month. Here's a recap of my discussions of each of the above indicators, and why they suggest this Expansion probably isn't a "Jobless Recovery" any more -- or at least won't be after January.

The 4 "Leading Indicators" I found, which in the past have specifically portended job growth, typically turn in the following order:

(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.

By September, (1) through (4) had already happened, leaving only number (5), which is all about the strength of the turns. Based on those relationships, in September

As of last week, all of those indicators have now signaled that actual job growth in the economy is set to occur.

I. Real Retail Sales

Contrary to the commonly held belief, historically it has not been the case that job growth leads to consumption. Rather, it is the other way around. Consumer spending typically leads jobs with a lag of about 5 months. Here is a graph showing that point as an average of all post-World War 2 recessions (0 = the month a recession ends):

Real retail sales (that is, retail sales adjusted for inflation) are the "Holy Grail" of Leading Indicators for job growth. They have consistently turned at both tops and bottoms, an average of 3-5 months before job growth or losses turned. When real retail sales stay flat, they generate a lot of noise, and a longer period between the turn in sales and payrolls. Strong turns in sales generate reliable subsequent moves in payrolls in subsequent months. 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. In order to show you this relationship in the most comprehensive way, I am reproducing here graphs showing the entire 60 year record of real retail sales compared with jobs. With the sole exception of the 1961 recession, Real retail sales (the blue line) has consistently made peaks and troughs ahead of payrolls (the red line) ...

in the postwar period from 1948 through the 1962:

as it did during the 1970s recessions (ex the 1970 trough):

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

as it has done now:

On a three month smoothed average, Real retail sales bottomed in April of this year. This past week we learned that real retail sales through November are up 1.9% since then, for an annual rate of about 3.2% -- in other words, heralding actual job growth.

Another way of looking at the same data is to note that, in this Recession, employers have laid off employees exactly as if they were reacting to year-over-year retail sales data, as shown in this graph, where YoY real retail sales are in blue, and payroll gains/losses are in red:

I'm not claiming any deep rational relationship is portrayed in this last graph, just an extremely close fit of the two data series. If the correlation were to continue, then if real retail sales are merely flat this month, meaning they are up 1.9% YoY, payrolls would come over +100,000 (+/- 75,000 variance)! At very least, this is a very strong harbinger of a positive jobs reading.

II. Initial Jobless Claims

Initial jobless claims is weekly number of people who have applied for unemployment benefits for the first time after being laid off. These jobless claims have a good track record of predicting job gains. In those recoveries where jobless claims have fallen steeply, peak unemployment occurred within 2 months of the point where jobless claims fell 12% from the peak; but in those "jobless recoveries" where jobless claims has fallen slowly, peak unemployment occurred not at the 12% mark, but only when new jobless claims were more than 16% less than peak claims, and stayed more than 16% off for at least 3 months thereafter.

Here is a graph comparing this recession with the two previous "jobless recoveries" and the V shaped deep recession of 1982 in terms of initial jobless claims:

In the graph above, the blue lines represent the first 8 months after the peak in initial claims. The green lines represent the continuation of initial claims until the point where both jobs and the unemployment rate finally bottomed in the two "jobless recoveries." As you can see, jobless claims failed to penetrate the 20% off level except for a brief instance in summer 2002 (coinciding with a brief positive jobs number).

In our recession/expansion, initial claims declined 16% from their highs in October, and have declined more rapidly since then. As of this past week, initial jobless claims are off 29% from their April peak. This is not comparable at all to the two "jobless recoveries" but as of now is only comparable to 1983. In short, initial jobless claims are now also heralding actual job growth in the economy.

III. ISM Manufacturing

The ISM Manufacturing Index is a survey which asks purchasing managers for manufacturers if their business is getting better or worse, and contains a sub-index in which business indicate their hiring or firing intentions for the next month. It is a "diffusion index" in which 50 is the dividing line between expansion and contraction. In the very strong recovery after 1982, as well as during the weak recoveries of 1992 and 2002, the 53 level is the point where jobs began to be added. Further, a reading over 54 on the index has always coincided with actual job growth.

Additionally, whenever the hiring vs. firing sub-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; and also, 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.

The ISM manufacturing index expanded at 55.7 in October and 53.6 in November. (in the graph, the ISM reading of 53 - in blue - is normed to 100. The red lines represent job growth/losses in the noted recessions and recoveries):

This indicator too is heralding job growth.

IV. Industrial Production

Industrial production means exactly what it sounds like it does. It tends to peak a median +2 months before payrolls, and to trough at the end of recessions a median +1 month before payrolls. Of the 10 troughs since World War 2, in 8 of them industrial production troughed within 2 months of the payrolls number. Further, 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.

This year, since bottoming in June, Industrial Production is up 3.6% for an annual rate of 8.7%. This is the best rate of expansion off a recession bottom since 1982, and far exceeds the 1992 and 2002 "jobless recoveries," as indicated in this graph of industrial production from 5 months before to 5 months after the bottom in each recession since 1982:

Industrial production is indeed having a "V" shaped recovery, meaning that it too -- the 4th of four indicators -- is heralding actual job growth.

V. Other signs: the Houshold Survey, Leading Indicators, Employment Trends Index vs. ISM Non-manufacturing, Okun's law

1. The Household Employment Survey

There are actually two surveys of employment conducted each month. While the typically reported number comes from the "Establishment survey" of employers, there is also a "household survey". The household survey has a wider measure of employment, so the two do not measure the exact same thing, but over time they are very closely correlated. More to our point, as noted by renowned bear David Rosenberg:

The Establishment Survey (nonfarm payrolls), has a “large company” bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recession....

Indeed, the household survey almost always turns either coincident with or one to two months before the establishment survey, as can be seen in this graph of the two prior "jobless recoveries":

Although it was not reported widely at all, in fact the household survey (blue line) did indeed show +227,000 jobs added to the economy in November (payroll survey in red):

Together with all of the other above data, this appears to be strong confirmation that we are at a turning point.

2. Leading Indicators

The Index of Leading Economic Indicators is now up 8 months in a row, in is up 5.7% Year-over-year. This graph shows the index since 1992.

What is important for our purposes is that even as to the two "jobless recoveries", jobs were finally added (and briefly so in mid-2002) whenever the Index was up more than 5% YoY -- just as it is now.

3. The Conference Board's Employment Trends Index

It turns out that I am not the only one putting together an index specifically geared towards leading indicators for job growth. Within the last two years, the Conference Board (the private group which also calculates the LEI) also put together a historical series of indicators that have tended to signal job growth in the near future. Called the "employment trends index," the Conference Board reported this month that the

Emplyment Trends Index increased for the fourth consecutive month. The index now stands at 90.8, up 1.8 percent from the revised October figure.

Here is the most recent graph I could find, which omits the last few months.

It is noteworthy that the series has always previously turned at bottoms 1 to 4 months before job growth. Since the indicator has turned up for the last 4 months, that again is yet another signal that the turn is here.

4. ISM Non manufacturing employment survey

No picture is perfect. While there is a wealth of data, discussed above, suggesting that the the bottom for jobs is occuring in the November-January window, there are a few contrary indicators.

Throughout the last ten years, the ISM Non-manufacturing employment index has been a close fit, especially on a three-month smoothed basis, to the jobs data. Here is the graph, through October,

In November, the Index was reported at 41.6, still showing strong contraction. This index is the one strong "yellow flag" compared with the other data. On the other hand, the series is only 15 years old, so we have no way to compere data with the 1991, 1982, or other prior recessions, so I have not weighted it that strongly.

5. Okun's Law

The other cautionary data point is "Okun's law", which generally holds that for every two percent gained/lost in GDP, unemployment changes by 1%. I have previously written at length about how, especially in the aftermath of offshoring, it takes 2% GDP measured on a YoY basis to result in the gain of one net job. As this graph of YoY GDP (green) vs. payroll gains/losses shows, even with 2.8% growth in the third quarter, and almost certain growth again this quarter, we won't be there.

While this is also a strong caution, on the other hand, Prof. James Hamilton of UCSD has written that:

the change in employment during this recession was noticeably more negative than the standard Okun's Law regression would predict. On the assumption that historical relationships reassert themselves, we surmise that employment could bounce back more strongly during this recovery

In other words, "Okun's law" was violated to the downside during the slump. For the long-term relationship to reassert itself, "Okun's law" may well be violated to the upside now. It is also worth noting that the Leading Indicators strongly suggest that growth will continue through the first quarter of next year. If that is true, then Q1 2010 may yet show +2% YoY GDP growth, which would not significantly violate the idea of job growth beginning now.

VI. Summary and Conclusion

In summary, all 4 of the leading indicators for actual job growth in the economy -- Real retail sales, Initial Jobless Claims (not shown), ISM manufacturing, and Industrial Production -- are now at the levels that portend job growth. This graph captures the percentage growth off the bottom for both real retail sales (blue, +1.9%), industrial production (green, +3.6%), the household employment survey (brown, +227,000 jobs), and the likely bottom, now, of payrolls (red):

It could be that November's (- 11,000) payrolls number is revised to a positive one (note that in all of the last 4 months, the initial reading has been revised by about +75,000); or it may be that the number doesn't bottom until January and turn up thereafter. But it certainly appears that the bottom for jobs is essentially right now.

Market Mondays

It seems appropriate to take a look at the SPYs for the year.

A.) The market bottomed in March on extremely high volume indicating a selling climax.

B.) The market rallied from the lows in March to early June. Prices ran into upside resistance around the 200 day EMA

C.) From June until mid-July prices formed a downward sloping pennant pattern. Prices hit just a bit below the 50 day EMA

D.) From early July until early December prices rallied. However, notice that prices are arcing -- that is, their overall trajectory is decreasing.

E.) In December prices have stalled and are forming what appears to be a rectangle consolidation pattern.

F.) The biggest problem with the rally is that volume has continually decreased as prices have moved higher.

Weekend Weimar and Beagle

It's that time of the week. We'll be back Monday for a Holiday shortened week.

Until then ....

Weekly Indicators

- by New Deal democrat

Virtually all of the monthly and weekly data points reported this week indicated continued economic expansion. Both the PPI and CPI explicitly turned from YoY deflation to inflation, showing pricing power. Housing permits and starts rebounded strongly from last month's surprise decline (probably a one-off result of an anticipated ending of the $8000 housing credit). Industrial production and capacity utilization rose strongly, while the New York and Philly Fed regional reports for December were contradictory, one nearly tipping into contraction and the other showing expansion at an increasing rate. November Leading Indicators were reported at +0.9, indicating economic growth will probably continue right through the first quarter of next year.

Turning to the high-frequency weekly data:

Weekly sales at retail chains rebounded slightly, rising 0.4% [pdf] for the week ending December 12, 2009, and 2.4% on a YoY basis.

Shoppertrak likewise said sales rose 1.1% on a YoY basis, and 18.2% percent from the previous week, completely erasing that post-Black Friday downturn.

The BLS reported that initial jobless claims were up 7000 last week to 480,000, but the 4 week moving average continued to decline.

Gasoline usage last week remained steady at a rate slightly above last year's, while the average cost of a gallon of gas dropped out of its 8 week range, to $1.59.

Halfway through the month, on the 16th the Daily Treasury Statement showed $79.8B paid in withholding taxes, compared with $84.2B on the same day last year, indicating that the distress of state and local governments in particular is intensifying and has not yet started to reverse.

Finally, the Railfax report for last week showed that cyclical traffic was almost exactly that of a year ago. Intermodal traffic is not far behind. The only types of cargo not greater than their shipments a year ago are coal and forest products. All divisions of traffic have finally begun their seasonal decline, but cyclical traffic in particular has been quite steady over the last three months, a continuing good sign. Last week a representative of Railfax commented here that "We break the data into three distinct categories that should be viewed independently. Then the data can be used as a proxy for the manufacturing economy (cyclical), imports (intermodal) and electrical production (baseline). And you can always call us with your questions."

In summary, this week showed a continuing substantial economic expansion, with slightly easing weakness in the labor market.

Philadelphia Fed Increases

The Philadelphia Federal Reserve's Manufacturing survey increased this from from 16.7 to 20.4.

Here's a chart of the data:


Click for a larger image.

Note the number has increased for most of the year, rising from a reading a ~(-40) to it's current reading of 20. However, also note that on the future expectation's chart we see a decline in the future expectation's index. However, note we saw a similar pattern after the last recession when optimism jumped at the beginning of the expansion but waned throughout the recovery. This time we are seeing that decrease happen quickly which is a concern.

Also of note: the employment index showed net hiring for the first time since late 2007.

Unemployment Drops in 36 States; Remains Unchanged in 8

From the BLS:

Regional and state unemployment rates were generally lower in November.
Thirty-six states and the District of Columbia recorded over-the-month unemployment rate decreases, 8 states registered rate increases, and 6 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia. The national unemployment rate edged down in November to 10.0 percent, 0.2 percentage point lower than October, but3.2 points higher than November 2008.

In November, nonfarm payroll employment increased in 19 states and decreased in 31 states and the District of Columbia. The largest over-the-month increase in employment occurred in Texas (+17,300), followed by Ohio (+5,400), Georgia (+4,800), and Arizona and Iowa (+4,300 each) Alaska experienced the largest over-the-month percentage increase in employment (+0.5 percent), followed by Iowa (+0.3 percent). The largest over-the-month decrease in employment occurred in Florida (-16,700), followed by Michigan (-14,000), California and Pennsylvania (-10,200 each), and New Jersey (-9,400). Hawaii (-1.0 percent) experienced the largest over-the-month percentage decrease in employment, followed by Nevada (-0.7 percent) and Maine, Mississippi, and Montana (-0.6 percent each). Over the year, nonfarm employment decreased in all 50 states and increased in the District of Columbia. The largest over-the-year percentage decreases occurred in Nevada (-6.1 percent), Wyoming (-6.0
percent), Michigan (-5.9 percent), Arizona (-5.6 percent), and Oregon
(-5.2 percent).

Because this is good economic news it is an inherently flawed report that is nothing more than government propaganda. If it was bad news, then the numbers would be sacrosanct.

Thanks to NDD for the email on this...

Gold Retreats

Click for a larger image.

A.) Prices have retreated from their high. They are currently standing at the 50 day EMA and important Fibonacci levels.

B.) Momentum has decreased but

C.) We're not seeing a huge flight volume wise out of the market. That would make this sell-off the beginning of a correction rather than a change in trend.

Forex Fridays

Click for a larger image

A.) Prices are in a clear uptrend now and have moved through key areas of resistance. Yesterday prices printed a strong and solid bar.

B.) The EMA picture is turning bullish. All the EMAs are moving higher, the 10 day EMA has moved through the 50 day EMA and the 20 is about to. In addition, prices are above the EMAs

C.) The relative strength is increasing, indicating prices are getting stronger relative to other prices

D.) Momentum is increasing as well.



A.) Prices have broken through the upper trend line that contained prices.

B.) prices are getting stronger

C.) The MACD has given a buy signal.

The daily and weekly charts have lined up to give a combined buy signal. The question is why? What is the (if any) fundamental reason for this change?

Today's Market

Click for a larger image.

This is a chart for the Russell micro-cap index.

A.) Although prices have broken through top-side resistance, they have made little gains. That is troubling, especially when

B.) Momentum is clearly on the bulls side and

C.) Money is flowing into the market.

The New Consumer

Barron's originally dealt with this back in June:

As savings rise and the market rallies, however, a new consumer is emerging, seeking a sensible middle ground between the gross excesses of the mid-2000s and the privations of the past year. He -- and more often, she -- is likely to find it in companies that offer great products, excellent service and outstanding value, which, by the way, doesn't always mean the lowest price.

Now the WSJ weighs in:

The economy appears to have begun recovering after the worst recession in half a century. But businesses ranging from shoemakers to financial services to luxury hotels don't expect American consumers to return to their spendthrift ways anytime soon. They see consumers emerging from the punishing downturn with a new mind-set: careful, practical, more socially conscious and embarrassed by flashy shows of wealth.

Much as the 1930s shaped the spending habits of an entire generation, many companies now anticipate a shift in consumer behavior that persists even after jobs and growth get back closer to normal.

"We seem to be at a cultural inflection point that we haven't seen since World War II," said Jim Taylor, vice chairman of market researcher the Harrison Group. Last month it surveyed 1,800 affluent Americans and found that 48% think they could suffer major financial losses in the future. "People are getting used to being careful, and I don't know how you undo that," Mr. Taylor said.

This ties in to a few interesting developments.

Total household debt outstanding is decreasing. Therefore

Debt service payments as a percentage of disposable income are decreasing. In addition

The financial services obligation ratio is also dropping. In addition,

The savings rate is increasing, indicating we're spending less.

So, we're paying down debt and becoming thriftier. We're becoming our parents.

FOMC Statement

From the Federal Reserve:

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Let's look at some of the charts to get a better idea of what the Fed sees. As always, click on each image for a larger image.


Existing home sales have been picking up for most of the year as have



New homes sales (h/t Calculated Risk).


Real retail sales have bottomed. Note: I originally used the non-inflation adjusted chart for this. Sorry for the mistake.



Real PCEs are increasing, although weakly.





Real private fixed investment has been flat for the last ~6 months.


Initial unemployment claims are dropping. That tells us that the rate of job losses continues to deteriorate. In addition,


The rate of establishment job losses continues to moderate as well.

Bottom line -- and I've been saying for about 7-9 months now -- the economy is stabilizing and in some cases improving. It's not the greatest expansion we've ever seen, but considering where we were it's about what we should expect.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

BUT .. the Fed is not expecting a strong economy (and they shouldn't) so they're keeping things easy for now.

Initial Jobless Claims: 480,000; Nov. LEI +0.9

- by New Deal democrat

The BLS reported that for the week ending December 12, seasonally adjusted initial jobless claims were 480,000, up 7,000 from last week's slightly revised 473,000.

The 4-week moving average is now 467,500, compared with 472,750 last week. The 4 week seasonally adjusted moving average is now about 29% lower than the peak of 658,750 on April 3 of this year. (During the last two "jobless recoveries", new claims never declined anywhere near 29% from peak).

Unadjusted, there were 555,344 new claims, a decrease of 107,393 from the week before, showing how much seasonal volatility exists in the weekly numbers at this time of year. Today's reading is well below the 626,867 initial claims in the same week last year.

This week's initial jobless claims number is the "Big One," because last week (the week being reported on) was the week during which the BLS made its December jobs survey. Here's the relationship between the initial jobless claims number in the reference week (left) and the monthly jobs number (right) since ther peak in Initial Jobless Claims at the beginning of April:

2009-04-01 (+648) (-519)
2009-05-01 (+630) (-303)
2009-06-01 (+617) (-463)
2009-07-01 (+567) (-304)
2009-08-01 (+571) (-154)
2009-09-01 (+564) (-139)
2009-10-01 (+532) (-111)
2009-11-01 (+513) (- 11)
2998-12-01 (+480) ????

In summary, based on my prior research, initial jobless claims are suggesting that actual job growth is taking place in the economy this month.

From Bonddad -- here's the chart:


Notice the 4-week moving average continues to move lower. This tells us the overall trend is in place.
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UPDATE: November LEI were reported at +0.9. October's stayed at +0.3 (housing permits didn't add or subtract as much as I thought). This means that in the last 8 months, the LEI are up +6.8. YoY LEI are up +5.7. This is also very consistent with the YoY readings during the last two recoveries when jobs were finally added to the economy.

Thursday Oil-Market Round-Up

A.) Oil prices broke through the lower end of their trading range last week and sold-off. Note that withing the sell-off we have a large gap down and a strong downward sloping bar.

B.) Prices rebounded yesterday, printing a large upwardly moving candle.

C.) Despite yesterday's move, momentum is still downward.

D.) Notice that money is flowing out of the oil market in the latest sell-off.

I should add that the EMA picture is negative. Prices are now below the 200 day EMA, the shorter EMAs are below the longer EMAs and all the EMAs are moving lower.

Today's Market

I've been commenting a lot lately about how the market has stalled. Corey over at Afraid to Trade offers a great explanation as to why.

Housing Permits & Starts and Oct./Nov. LEI

This morning's release of Housing Permits and Starts is cause for a big sigh of relief. Permits, which had dropped from 575,000 in September (their high water mark for the year) to 552,000 in October, rebounded to 584,000 in November. Similarly, Starts, which also plummeted from 592,000 to 529,000 in October, rebounded to 574,000.

Aside from confirming that October's nasty surprise was a one-off event linked to the expiration of the $8000 housing credit program, this rebound also means that the fundamental increase in the Leading Economic Indicators has not been disturbed. Earlier I estimated that October revisions plus November indicators would probably net ~+0.3. That remains true. Since I believe October may get revised down ~0.4, this means that October's LEI may be revised to -0.1 -- but on the other hand, November's LEI will probably come in at ~+0.7.

Producer Prices Increase 1.8%; CPI Increases .4%

From the BLS:

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. In November, at the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.4 percent, and the crude goods index rose 5.7 percent. On an unadjusted basis, prices for finished goods moved up 2.4 percent for the 12 months ended November 2009, their first 12-month increase since November 2008.

About three-fourths of the November advance in the finished goods index can be traced to higher prices for energy goods, which jumped 6.9 percent. The indexes for finished goods less foods and energy and for finished consumer foods also contributed to the finished goods increase, both rising 0.5 percent.

Note that energy prices are currently decreasing. Should that trend continue I would expect a lower number next month. In addition, consider this chart of data from the same report:



Click for a larger image

Notice that producer prices have had two other large increases over the last 6 months, both largely caused by energy prices. Producer Prices dropped back down the next month on a decrease in energy prices. The "jumping around" effect is shown really well in the following chart:



Finally on PPI we have this year over year chart:


The fears of deflation are probably close to being extinguished at this point with the year over year increase.

From the BLS:

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months the index increased 1.8 percent before seasonal adjustment, the first positive 12-month change since February 2009.

The seasonally adjusted increase in the all items index was due to a 4.1 percent increase in the energy index. The index for gasoline rose sharply and the indexes for electricity, fuel oil, and natural gas also increased, creating the fourth consecutive rise in the energy index and the largest increase since August. In contrast, the index for all items less food and energy was unchanged in November, after ten consecutive monthly increases. Declines in shelter indexes offset increases in the indexes for new and used motor vehicles, medical care, airline fares, and tobacco.

Let's look at the data from the report.

First, we've had increases in 8 of the past 12 months. That is actually good news because it indicates we're probably clear of a deflationary threat. In the long-run that is very good news.


Notice the year over year number is now back in positive territory. This is the same pattern the PPI followed and it is also good news largely because it means we're probably clear of a deflationary threat.


Click for a larger image.

The primary reason for this month's increase was energy prices -- just like PPI.
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NDD here, adding the following:

The same factors apply to the CPI as to the PPI. In short, it’s all about Oil – correlating with the run-up in Oil from $70 to $80/barrel.

Note that at the moment Oil is back down to $70/barrel which suggests that December may take back all of the November increase. In short, there are no real inflation concerns in the consumer number.

1.8% inflation with a ZIRP by the Fed = EZ money! And that means economic growth in the immediate future. If anything, the fact that YoY core inflation continues to be very low – only 1.7% again this month – is cause for concern in that there is very little cushion between here and institutionalized deflation (see Prof. Krugman re: this). The more present problem is that YoY PPI at 2.7% is higher than YoY CPI at 1.8%. If that is just a one month blip, it’s not a big deal. But if it continues, that means that producers are unable to pass on commodity price increases to already-strapped consumers, and that in turn is a recipe for yet another retrenchment in hiring and production.

Back over to Bonddad:
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I would disagree regarding institutionalized deflation, largely based on the trajectory the year over year PPI and CPI have taken over the last 12 months. Both moved into negative territory and just now become positive. I think both are moving in the right direction and will continue to do so.

In summary, the jump in both producer and consumer prices was caused by energy prices which are currently declining. In other words, I think we're out of the woods for now.

Dennis Gartman: Partisan Hack

I have long respected Dennis Gartman and read his work whenever I can get my hands on it. I don't always agree with him, but he's always insightful and interesting.

Sadly, he showed his true partisan colors yesterday on Bloomberg TV when he reiterated -- at least three times -- that the cause of our recent economic near-death experience was "the government forcing banks to make loans to people who never should have gotten them in the first place" (e.g. The CRA made me do it). That canard has been discredited so many times, for so long, by so many people -- including members of the Fed and bank execs themselves -- that I couldn't even believe Gartman was going to try to breathe life into it. But there he was.

Sorry, Dennis, I think many folks lost a great deal of respect for you yesterday. I know I did. Credible pundits should take better care to separate their politics from their economic analysis. The two don't belong together.

Cites:

Federal Reserve: "In the end, our analysis on balance runs counter to the contention that the CRA contributed in any substantive way to the current crisis."

Ken Lewis, BofA CEO: "But the charge that CRA lending was the primary or foundational cause of our housing crisis is not only unfair, it’s not true. [...] There’s no mandate to make risky loans, or to abandon sound lending principles. [...] Many reports and investigations, including a Fed report in 2000 and our own experience over the past 30 years, have found that CRA lending can be profitable, and need not be overly risky. The riskiest subprime lending of the past ten years didn’t have anything to do with CRA… in fact, 75% of high-priced loans made by mortgage companies and bank affiliates in recent years were not covered by CRA."

Literally dozens of others all over the web.

From Bonddad: This is one of the basic problems with the US: pure stupidity and a need to explain everything through a partisan lens. The causes of the financial wreckage of 2008 were numerous. In essence, to understand them you have to be aware of how multiple events can play out. This requires thinking beyond labels and talking points. That is not possible in today's political environment.

Wednesday Commodities Round-Up

Click for a larger image.

Notice the overall trend of natural gas has been down for some time -- as in months. However




We may be seeing the bottom of the trend.

A.) Prices have clearly reversed. They have moved though all the EMAs and are now above them all. Also notice the 10 and 20 day EMAs are rising and the 10 day EMA has moved through the 20 day EMA.

B.) Momentum is increasing. However,

C.) We've not seeing a big move in the A/D line, indicating we have yet to see a big influx of capital into the market.

However,



Note that on four other occasions this year prices have been at this level only to be rebuffed.

Today's Market

Note the last four days we've seen some incredibly poor candles -- narrow bodies with long shadows. Also note that prices have had an incredibly difficult time getting over the 111-112 area. Finally, volume isn't that strong.

The EMA picture is still positive -- all are rising and the shorter are above the longer.

Overall, I'm still not happy with the market.

Flow Of Funds Debt Section

In the previous post on the household balance sheet, we saw a drop in household liabilities. Let's take a deeper look at that trend. As always, click on an image for a larger image



Note the first really large drop in household debt acquisition was in 2008 when we saw an annual increase of only .3%. The 6.7% increase in 2007 was still in line the annual percentage increases in the 1990s.


We see that by the second quarter of 2008, the quarter to quarter percentage change was barely positive. Since then it has been negative. This chart directly tracks the two primary components: mortgage and consumer debt.


Household mortgage debt growth went negative in the second quarter of 2008,


But non-mortgage debt's percentage increase went negative in the fourth quarter of 2008.

This information tells us the US consumer is now shedding debt. This is consistent with the contraction we have been seeing in consumer credit. It bodes well for the future because household debt reached incredibly high proportions during the last expansion.