A thought for Sunday: the boring devil of an economy you know

 - by New Deal democrat

I have always wanted to give readers "value added" -- not just report on the data like you can read at 100 different sites, or expound on a worldview with (intentionally or unintentionally) cherry-picked data.  I think I'm pretty good at the economic version of what Wayne Gretsky famously called "skating to where the puck will be," and presumably you do too or you wouldn't be reading me!  Since it's Sunday so I can kick off my shoes and pontificate without having to document everything with data. I thought I'd update my view of the bigger picture, since it is something I haven't done in awhile,

1.  There is no political will to do anything to assist the economy, e.g., infrastructure repairs and upgrades, assistance to the middle/working classes.  Back in 2009, Bonddad and I jointly called for the creation of a new WPA to help ameliorate the worst unemployment situation in 75 years.  It become pretty clear by 2010 that none of the things an activist government might have done were going to happen, beyond the 2009 stimulus.  I haven't seen the point in arguing in favor of any progressive economic agenda items that not only aren't going to happen before 2016, they almost certainly aren't going to happen before 2020 as things stand now.

The best we can hope for in the foreseeable future is that Washington does no further damage to the average American's well being, with further spasms of austerity (e.g., cutting off extended jobless benefits) or downright recklessness (threatening to refuse to pay the US's bills).

2.  Since Washington isn't going to be of any assistance, this is the economy we have.  It has been, is now, and is probably going to continue to grow at 2% or so, give or take.  Jobs will probably continue to grow by about 200,000 a month, with the occasional upside or downside outliers. The various unemployment rates will probably continue to slowly decrease.  Real wages will continue to be flat to slowly rising.  

The slow growth is the result of a number of factors:  the global race to the bottom, the ever-increasing concentration of wealth, continuing advances in automation, the secular increase in the price of Oil, and an aging population not only in the US but throughout the developed world (older folks don't buy nearly as much new stuff as younger folks who are making a new home and raising children).

The slow growth we've experienced since 2009 isn't going to change for the better in the immediate future.  On the other hand, there is no sign that it is about to change for the worse.

3. While we are probably past the middle of the cycle, this is hardly shocking 5 years after the economy started to improve.  The typical spending patterns I would expect to see as the cycle wears on have happened - e.g., a slow decline in real consumer spending, and a general plateauing in the purchase of vehicles.  But that doesn't mean The End is Near.  In fact, one of the noteworthy things I've noticed in the last few months is the virtual disappearance of Doomer commentary.  It's so bad I actually have to go over and read Zero Hedge to make sure it still exists.

So let me tell you what I think reasonably could change the present dynamic for better or worse in the near future.

4.  What would make the economy come closer to "escape velocity?"  Is there anything that is reasonably likely to happen that could give the economy a second wind?  I see two candidates:

• Even lower long term interest rates (refinancing, home purchasing).  Long term treasuries bottomed at 1.74% in mid 2012.  Mortgage rates made a bottom just over 3% shortly thereafter. Corporate bonds yields also made lows in 2012.  Recently corporate bonds in particular have come near those lows.  A new low in bond yields would send a powerful signal that the expansion is going to continue for awhile, especially with the inevitable new round of refinancing of consumer debt at lower rates.

•  Gas prices declining under $3/gallon. Gas prices are like a tax on consumption.  The less consumers spend on gas, the more they can both save and spend on other stuff.

•  A significant rise in median real wages.  This would be nice.  I just don't see it in the near future (except as a byproduct of a further fall in gas prices).  Hence, not a third candidate.

5.  On the other hand, what are the most likely trends that would cause an economic downturn? 

•  Well, first of all, the reverse of the two items I listed above.  Higher interest rates would bite into consumption, as would higher gas prices.

•  "Conundrum 2."  If the Fed actually starts raising short term rates while long term rates are declining, that would create one of the classic signs of a recession coming - i.e., a flat to inverted yield curve.  If it happens in a deflationary environment, that would be even worse.  Such a yield curve has only happened twice in the last 90 years -- in 1928 and 2006.  That's why I call it the "Death Star."

•  The combination of no increase in wages, no new lows in long term interest rates so no refinancing,  together with a significant downturn in stock prices lasting several quarters. This is the most likely scenario.  By next summer, we will have gone 3 years without consumers having been able to refinance debt at lower interest rates.  Since 1981, this has been the sine qua non for a downturn. When the inability to refinance is accompanied by no wage increase, and no increase to new highs in widely held assets, in each case a recession has followed.  

At the moment, house prices are still increasing, but not nearly to new highs, and there is very little home equity withdrawal going on, so that is not a source of consumer funds.  On the other hand, stocks have been making new highs all this year.  This appears to be having a pronounced wealth effect among the affluent to wealthy households that own stocks, and is fueling consumption (although none of that is "trickling down" to the bottom tiers).

In conclusion, unitl one of the above scenarios finally tips the balance, growth will wax and wane.  I still think there will be deceleration in the remaining part of this year.  An uptick in the first part of next year looks more likely than a continued deceleration.

Weekly Indicators for September 15 -19 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

At the beginning of this year, I forecast a deceleration of growth in the latter part of the year.  It may be starting to show up.

About recovery, the American people "get it"

 - by New Deal democrat

I wanted to pass this on, from Pew Research via Digby.

Asked about whether the American economy is in a recovery, and if so, how strong, here was the breakdown of the replies:

It strikes me that this is probably also a pretty good self-report on economic well-being over the last few years.  Most Americans' individual position has improved, but not as much as they would like or need.  A small minority has made out quite well, and a larger minority has been completely left behind.

This is the point Bonddad and I have been making for 5 years.  Yes, the economy is recovering, yes it is a positive.  It's just not good enough.  The American people get it.

August housing permits: apartments are still carrying the market

 - by New Deal democrat

I have a new post up at XE.com about this morning's housing report.

Most of the analysis seems to be slightly DOOOMish clickbait. In fact, while this report was poor month-over-month,  a longer-term look supports positivity about the coming months.

John Hinderaker: The Great Contrary Indicator

On September 3, 2009, John Hinderaker at Powerline wrote the following:

We’ll let it rest there: hyperinflation or default. One or the other is the inevitable result of the unprecedented irresponsibility of Barack Obama’s administration. Either one is a disaster, not so much for us, but for our children. Obama and his advisers are gambling, evidently, that we don’t care much what happens to our children and grandchildren, or to our country after we’re gone.

Yet today, we have this from Dr. Yardeni:

 

Since Mr. Hinderaker made his inflation prediction, global inflation has been tame to non-existent. (Invictus and I debunked this claim of hyperinflation when it was made.  See this article at the Huffington Post)

 

And the US default?

 

 

 

The budget gap is closing.

 

And then in 2010 he advised that you should buy gold:

 

This seems like a clue as to where the Obama administration intends to take the economy. If I’m not mistaken, Jimmy Carter did much the same thing: juice the currency, try to stimulate growth and worry about the inevitable inflation later. The problem, of course, is that the federal government’s policies are doing just about everything possible to suppress economic growth. Nothing the Fed can do will make up for an anti-growth, anti-business administration. But it can create inflation, and here’s betting it will. The moral of the story is, look for the dollar to decline sharply. Buy gold.

 

So -- how is that gold bet paying off?  According to today's Business Insider Gold Looks Like Death:

 

Remember gold?

We used to talk a lot about it around these parts, but we've pretty much stopped following it ever since the whole goldbug, Fed-hater thing got so thoroughly discredited.

Anyway, it's not looking so hot. In fact, it kind of looks like death.

And the dollar collapse:

 

 

Here's the deal: Mr. Hinderaker has been a great contrary indicator for the past 5 years.   Whatever he says, DO THE OPPOSITE.  He's that bad

 

 

 

 

 



The loosening OIl choke collar is helping real wage growth

 - by New Deal democrat

I have a new post up at XE.com.  Together with the trend of slowly rising wage growth, today's -0.2% CPI reading, fueled by the continued loosening of the Oil choke collar, is just what the doctor ordered.

John Hinderaker Can't Even Read A Graph

Now we have the headline "Income Stagnation Under Democrats."

Hinderaker posts this graphic from the Census, claiming it shows Democratic policies lead to a drop in incomes:

Except, of course, that isn't what the graph shows.  It shows the incomes rose in the 1980s and 1990s (Democrats and Republicans) and then moved sideways under Bush (who Hinderaker called a genius) and down under Obama.   In other words, it rose under a Republican and Democrat, stagnated under Bush and fell under Obama.  This is called chart reading, which Hinderaker obviously can't do.

And then there is this:

 

 

The reality is that as the labor force participation rate rose (largely due to women and baby boomers entering the labor force) incomes and the economy expanded.  But as the baby boomers started to retire (which is the primary reason for the drop in the LFPR) incomes started to stagnate.

 

So, Hinderaker can't even read a simple graph correctly.  Dear God, but this man is stupid.

John Hinderaker's Economic Incompetence In One Venn Diagram

Many thanks to both Economists View and Professor Krugman for linking to this piece.  If you'd like to read my more serious economic articles, please go over to the XE.com Currency Blog where most of my work is posted now.

I love when John Hinderaker tries to take down Paul Krugman.  One of the participants has a Nobel Prize in economics; the other has been consistently wrong about the economy for the better part of 10 years.  (In case you're wondering, the "Krugman is a hypocrite" argument was debunked here.   As usual, a simply internet search would have revealed that, but Hinderaker was never big on research.)

So, when Hinderaker used a Venn diagram from another blog, I made one of my own.  As you may know, Hinderaker was a big proponent of the argument that the Fed's QE would lead to a massive spike in inflation.  As I recently noted, Bloomberg calculated the cost of investing based on this advice.  Based on their calculations, the "inflation is just around the corner" trade would have lost an investor over $1 trillion dollars.  In honor of that little bit of data, I made the following diagram to show just how incompetent Hinderaker is at economics:

Weekly Indicators for September 8 - 12 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Will the big decrease in interest rates this year give housing a second wind?  Housing permits will assume more than their usual importance when they are reported in the coming week.

Expect another upward revision of Q2 GDP: over 4.5%?

 - by New Deal democrat

You may remember 3 months ago when Q1 GDP was revised all the way down to -2.9%, from an initial report of +0.1%, the main culprit was a sudden and unexpected decline in health care costs.  The BEA acknowledged that this came from exactly one report:  the Census Bureau's Quarterly Services Report.

I wrote a post confirming something Dean Baker (?) had written:  namely, that the same thing had occurred 50 years ago when Medicare was inaugurated.  There was a one quarter sudden and anomalous decline in GDP.  But then it was followed by a surge in the next quarter.

Well, this morning the Quarterly Services Report for the 2nd quarter was released, and it shows a similar surge in Q2 compared with Q1.  Hospital services, which unexpectedly declined -1.3% seasonally adjusted from Q4 2013 to Q1 2014, rose by +2.6% in Q2 2014.  The larger aggregate of health care services, which isn't seasonally adjusted in the report, rose +3.0% in the 2nd Quarter, after declining -2.0% in the 1st.

In comparison, the Q1 to Q2 change in 2013 for health services was about 2.2%, and added .4% to GDP.

While I am no maven of the minutiae of how GDP is calculated, nevertheless since 2nd quarter 2014 GDP as presently revised only shows a +.05% contribution by health care, it appears that at very least 2Q 2014 GDP is likely to be revised upward to 4.5% or better.

Even if so, the bad news is that the combined GDP for the first half of 2014 would still only be about +1.2%.

The Conundrumette

 -by New Deal democrat

I have a new post up at XE.com.

The unusual big divergence between stock returns (booming) vs. bond yields (falling significantly since January of this year) is trying to tell us something.  But what is it?

Why has job growth outperformed GDP growth?

 - by New Deal democrat

In mt last post, I politely took issue with Dean Baker's claim that August's mediocre jobs number was not an outlier.  Rather, I pointed out, for the last 3 /12 years we have had an unusually strong trend in job growth compared with GDP growth.

The YoY percentage of jobs added since World War Two  has been about -1.5% less than the YoY percentage growth of real GDP.  In other words, if GDP is about 2%, about half of the time there has only been  0.5% job growth or more, and about half the time there has been less than 0.5% growth.  Since the beginning of 2011, however, GDP has grown gernerally between 1.5% and 2.5% a year, but job growth has also ben about 1.5% a year -- about 1% higher than that median historical trend.

Here's the graph of YoY jobs - YoY GDP adjusted by 1.5%, so that the long term median is 0, for the last 30 years:

So why have jobs, relatively speaking, so significantly outperformed GDP?  Here's my working hypothesis.

Here is a graph you've seen a number of times before.  This is a graph of initial jobless claims as a percentage of the entire civilian labor force, plus those who are not in the labor force but want a job now:

What this adjustment does is tell us what percentage of people who hold a job, or want a job, are laid off in any particular week. In this way it takes into account demographics and in particular, the large cohort of Boomers over 55 years old who are retiring in droves.

What you can clearly see is that this ratio is extremely low.  Relatively speaking, the rate of layoffs is equal to the lowest in the last 50 years.  Another way of looking at this data is that employers are running particularly tight ships.  Compared with the entire post-WW2 era, they have pared the number of workers they need down to the absolute minimum for the current level of work.

The next graph is the percentage of all jobs that are temporary jobs:

This graph is just the opposite of the initial jobless claims graph.  It is at an all-time high.

Putting this all together, we have an employment environment where, compared with the post-WW2 era, employers have exactly enough employees to cover a regular workload with no slack whatsoever.   When the workload increases, the existing workforce is not sufficient to handle it.  New workers, with a bias towards temporary workers (who aren't entitled to medical benefits and whose contract can be terminated at any time) need to be employed.  This compares with the earlier era where new work meant that the slack in the workloads of existing employees was pared down.  The net result is that increased activity (increased GDP) leads to a need for relatively more new hires.

One way to test that is to compare hours worked with jobs created.  Once existing workers are pushed to the limit, the only way to increase output is to hire more workers.  As it happens, we can test exactly that by comparing aggregate hours worked in the economy (blue) to total jobs (red), and norming each to their prior peak in 2007:

What we see is that aggregate hours increased more than jobs until the entire shortfall was made up by about the beginning of 2012.  Since that time, both series have moved in nearly identical trends.  While it's not a perfect fit, it suggests that at least since the beginning of 2012, current employees have been fully utilized.  Increased output has required additional workers.

It seems to me this is a good explanation for the relative outperformance of job growth vs. GDP growth in the last 3 1/2 years.

Powerline Blog Issues No Response to My Request For a Comment On Their Longstanding And Incorrect Inflation Arguments

Since the Federal Reserve engaged in QE, Powerline  blog has been one of many voices arguing inflation would result.  It hasn't:

Bloomberg wrote an article about the Fed naysayers yesterday that included this calculation:

If you agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis, you missed $1 trillion of investment returns from buying and holding U.S. Treasuries.

That’s how much the government bonds have earned for investors since the end of 2008, when the Fed dropped interest rates close to zero and embarked on the first of three rounds of debt purchases to resuscitate an economy crippled by the worst recession since the Great Depression.

The resilience of Treasuries represents a rebuke to the chorus of skeptics from Stanford University’s John Taylor to billionaire hedge fund manager Paul Singer and U.S. House Speaker John Boehner, who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market. It also suggests investors see few signs the five-year-old expansion will produce the kind of price pressures that would compel Fed Chair Janet Yellen to side with the central bank’s hawkish officials as they consider when to raise rates.

I wrote an email to Powerline Feedback yesterday:

Gentlemen,

The writers at Powerline have uniformly argued the Fed’s policy of quantitative easing would lead to massive inflationary pressure. 

However, as pointed out in a recent Bloomberg article (see link below), if someone had followed this investment thesis (which would have led them to bet against the US Treasury Market) they would have lost a large amount of money.

Do you have any intention of issuing any type of “mea culpa” regarding your incorrect analysis?

http://www.bloomberg.com/news/2014-09-08/you-missed-1-trillion-return-agreeing-with-fed-naysayers.html

F. Hale Stewart JD, LLM

 

They have yet to write anything in response.

 

 

In which I politely disagree with Dean Baker about the employment report

 - by New Deal democrat

Last Friday Dean Baker wrote that Economists who understand economics didn't see the August Jobs Report as an Outlier, saying:

Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.

Let me state right here that, like Bill McBride a/k/a Calculated Risk, I think it most likely that August is simply an outlier.  As Jeff Miller pointed out on Sunday, the standard error in this series runs up to 100,000 a month, and as Bill pointed out, even in the best years for job growth, there has always been at least one faceplant.

You can probably see the issue here right off the bat:  If Dean is correct that August wasn't an outlier -- that if anything it was above trend at 142,000 -- then what about the last 7 months, in which 1.4 million jobs, or over 200,000 a month were added?  Were they all outliers?  In a row?  In fact, what about the last 3 1/2 years, as I'll show below.

To begin with, if we go back 65 years, all the way to 1948, when we can track both GDP and jobs, there have been 266 quarters in total.  When we compare real annualized job growth vs. real annualized GDP growth over those 266 quarters, the median difference is about 1.5%, meaning that in about half of those quarters, real GDP growth exceeded job growth by 1.5%, and in the other half real GDP growth was less than 1.5% higher than job growth.   Here's the graph - you'll just have to trust me on the count, unless you want to do it yourself!:

Here's a closer-in look at the last 30 years:

Two things to notice are (1) there is a lot of variability around that 1.5% median, and (2) since the beginning of 2011,   job growth has been well above trend in about 2/3 of the quarters, sometimes by over 2.5%.

Here's a slightly different way to look at the same thing.  This is the YoY% of real GDP growth (red) compared with the YoY% of job growth (blue):

You can see that job growth has typically been only about 0.5% to 1.0% less than real GDP growth for the last 3 1/2 years, in other words +0.5% to +1.0% higher than the long term trend that is Dean's benchmark.

So my question to Dean Baker is, respectfully, if August isn't the outlier, then what is your explanation for the job growth of ~8.2 million, or nearly 200,000 a month, for the last 3 1/2 years?

I do have a hypothesis, which I'll share in my next post.

Effects of age, the unemployment rate, and asset holdings on household income and welath

 - by New Deal democrat

Last Thursday the Federal Reserve came out with its Report on Consumer Finances for 2013.  This is the most in-depth cross-sectional look at the state of America's household balance sheets, so it is going to get a lot of play. Some of that discussion is going to be on point, and some of it will be misleading at best. So I thought in addition to giving you some value-added, that you probably won't read about elsewhere, I'd discuss a few ways the report is likely to be misinterpreted.

An important limitation: the survey badly lags

Before I begin in earnest, let me point out one important limitation of the study.  You are probably going to read a lot of analysis couched in the present progressive tense, as in, "income is declining."  That's not a true statement.  Because this survey is only conducted once every 3 years, the only comparison is between 1 year ago and 4 years ago.  The survey is unlikely to pick up a turning point that took place in 2012 (e.g., real median or average wages as measured in other reports).  For that, we'll have to wait for the 2016 report which will be published in 2017!  So you can see that this survey, while thorough, is badly lagging.

The economic rift in American society has been growing

So far what I have read hits the two biggest points:

• 1. Median income and wealth both declined compared with 2010 across cross sections
• 2. the divide between haves and have-nots is increasing.  Somewhere between the 50th and 75th percentile of income, a rift is developing. Balance sheets are improving roughly for the top 1/3 of Americans, and the higher the income percentile from there, the greater is the improvement. For roughly the bottom 2/3 of Americans, their incomes and wealth are declining.

For example, Digby highlighted the graph showing that the share of overall wealth owned by the top 3% grew. That for the next 7% is flat, and that for the bottom 90% shrank.

That wouldn't necessarily be so bad.  For example I'd rather own 9% of a $120 pie than 10% of a $100 pie.  The bigger problem is that, as shown in the graph below (2010 is left column, 2013 on right):

the bottom 90% has seen an outright decline in absolute wealth.

The millionaire next door is likely to also be known as "mom and dad"

As the above graph shows, the household at the 82.5th percentile is worth about $500,000.  the 95th percentile is worth just shy of $2 million. A reasonable guess is that 10% of all American households are worth $1 million.

Now let's see how wealth skews over age groups:

As I've said before, a 25 year old worth $250,000 is for all intents and purposes, rich.  A 65 year old worth $250,000 years old is no better than working class.

While the survey doesn't tell us what percent of millionaires are Boomers, the likelihood is that they are the lion's share.

While declining median wealth is widespread, demographics probably plays the biggest part

Next up, here is the graph of median incomes by age group:

Note that median income starts to drop off at age 55, and especially after the normal retirement age of approximately 65.

Since the number of people in the 25 to 54 age group has stagnated over the last 20 years, while the population over age 55 has surged in the same time period, as shown in this graph:

real median household income has declined as a simple matter of demographics.

It is interesting, and distressing, that median incomes have declined for declined drastically for those ages over 45-54 in particular.  I'd like to blame this all on the unemployment rate, but with the comparison period of 2010 (the peak in the unemployment rate was in 2009), it looks like there has been real hardship in this group in particular.  So demographics is not the only thing at work.  Still having a huge demographic retired into a lower income distribution has to be skewing the overall median figure more than anything else.

For wealth, asset classes made a huge difference

Although not a surprise, the report confirmed that, the more you relied on savings and on bonds, the more you suffered in the last few years.  Contrarily, if your main source of wealth was stocks, Happy Days are Here Again:

This is a graph of wealth, so it isn't just that CD's and bonds basically are paying nothing, it appears that people en masse pulled off of those asset groups.  It is likely that hose who could, rotated into stock mutual funds and ETF's.  Needless to say, the working class normally has its wealth ties up in housing (which lost value) and savings, whereas the wealthy have always had a far bigger share of wealth in investments like stocks. This only exacerbated the divergence in wealth.

The Federal Reserve report is further confirmation,  as Business Insider put it on Friday, that Piketty was right, as was the Occupy Wall Street movement. Until Washington is forced to respond more to the people than the plutocrats, we can expect the long-term trend to continue.

Weekly Indicators for September 1 - 5 at XE.com

 - by New Deal democrat

This week's post is up at XE.com.

Every now and then the nonfarm payrolls number just throws a spanner into the machine.  The weekly indicators don't suggest any slowdown has started at all.

A brief note about the Fed report on household wealth and income

 - by New Deal democrat

Yesterday the Fed released its report on 2013 household wealth and income.  The report only comes out once every three years, so the comparison is with 2010.

So far what I have read pretty accurately summarizes the report. But I want to add a few comments about items you probably won't read elsewhere, and some cautions about interpreting it.  I hope to have that up later today.

August jobs report: Jobs hit a speed bump

- by New Deal democrat

HEADLINES:

• 142,000 jobs added to the economy
• U3 unemployment rate declined from 6.2% to 6.1%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 45,000 to 6.304 million
• Employment/population ratio ages 25-54: up 0.2% from 76.6% to 76.8% (NEW POST-RECESSION HIGH)
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 (or +.3%) from $20.62 to $20.68, up 2.4% YoY

June was revised downward by -31,000 to 267,000. July was revised upward by 3,000 to 212,000.  The net revision was thus -28,000. 

Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for August show a little progress on wages, and mixed results on participation.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually risen for the first eight months of this year. As noted above they were 6.3 million in August.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

On the other hand, the participation rate in the prime working age group has made up 40% of its loss from its pre-recession high.

After inflation, real hourly wages for nonsupervisory employees probably increased from July to August. The YoY change in average hourly earnings is +2.4%, somewhat better than the inflation rate.

Finally, while the unemployment rate fell, it was because 64,000 people left the work force.  This only partially reverses last month's good number, with the net change in the civilian labor force over the last two months rose by 265,000, while the number of new jobs in the same two month period rose by 148,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed but with a positive bias.

• the average manufacturing workweek rose by +0.1 hours from 40.9 to 41.1.  This is one of the 10 components of the LEI, and will have a positive impact.


• construction jobs creased by 20,000. YoY construction jobs are up over 200,000, or about 4%.  This is good news.


• manufacturing jobs  were unchanged, and are up 168,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 13,000.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 22,000 to 2,609,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• The average workweek for all nonsupervisory workers was unchanged at 33.0 hours.


• Overtime hours was also unchanged at 3.4 hours.


• the index of aggregate hours worked in the economy grew by 0.1% from 108.7 to 108.8. 


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.2% to 12.0%.


• Part time jobs for economic reasons decreased by -234,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by only 16,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,189,000 increase in jobs YoY vs. 2,482,000 in the establishment survey. 


• Government jobs increased by 8,000.

• the overall employment to population ratio for all ages 16 and above was unchanged at 59.0% , and has risen by +0.4% YoY. The labor force participation rate fell from 62.9% to 62.8%, and has fallen by -0.4% YoY (but remember, this includes droves of retiring Boomers).

Relatively speaking, this was a poor report in comparison with the last 6 months.  But I wouldn't treat it as anything more than a speed bump. Most of the leading parts of the report were positive.  IN other words, this doesn't seem to herald a change in trend.

We did get a good number on wage growth, and we did get a good number on the prime age participation rate.  On the other hand, those who have dropped out of the labor force but would like to be employed remains signficiantly higher than it was at the end of last year.

No, Meteor Blades, household income does NOT measure the earnings of everyone in the household

 - by New Deal democrat

Real median income measures the INCOME of everyone in the household.

For example, if an 80 year old gets a pension payment, or interest payments on savings or bonds, that is included, even though it is not earnings. Since there are a lot more people over 55, and particularly over 65 now, as a percentage of the population, and they have lower income than prime working age households, real median household income has been in a secular decline.

That's why real median household income has mainly been telling us since 2000 that Boomers are leaving the work force,and now they are retiring in droves. Secondarily, it is a proxy for the employment to population ratio, as increased unemployment means lower income.

This may be the month unemployment finally falls below 6%

 - by New Deal democrat

I have a new post up at XE.com.

As you probably remember from past posts of mine, the ratio of initial jobless claims to the population is a pretty decent short leading indicator for the direction of the unemployment rate.

With July and August initial jobless claims in the vicinity of 300,000 and even less, we should finally cross to below the 6% threshold - i.e., a more "normal" unemployment rate - in the next several months.  Maybe even this Friday.

Weekly Indicators for August 25 - 29 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This was one of the most universally positive weeks I have ever seen. Only one series was negative and one neutral. Everything else was positive, several strongly so.

International Week In Review: Concerns Mounting For the EU and Japan

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/international-week-review-concern-mounting-about-eu-and-japan-edition

Problems Mount For the EU

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/problems-mount-eu

Comprehensive housing summary for July 2014: prices peak, but lower interest rates are putting an end to the sale slowdown

Wtih yesterday's report on pending home sales, housing data from the first 7 months of 2014 is in the books.  The data clearly shows that earlier this year was the trough of the housing slowdown, and that lower mortgage rates - down over .5% from the beginning of this year - are beginning to have a positive impact. At the same time, it appears that housing prices hit an interim peak earlier this summer, and are stabilizing if not in a slight decline.

I've seen some very poor analysis of the housing market, that I won't link to, in the last month.  For example, I've seen an argument, unsupported by actual data, that prices or even inventory, rather than interest rates, lead sales. This is demonstrably false if you simply look at the data.

You really need to remember the following.  The housing market tends to cycle in a regular order:

• 1st, interest rates turn
• 2nd, permits, starts, and sales turn
• 3rd, prices turn
• 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  July is when the turn in rates and prices became clear.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years through July:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates suggested that we would start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.  In July, in two of the three series, we did.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into outright  declines in the early part of this year.  New and existing home sales have been consistently negative YoY, and permits ended up at midyear only +2% in the first half of 2014 compared with the first half of 2013.

But with July's data, we can see that the trough of the housing slowdown is in place, and that there has been a significant positive turn in the last several months.  Only pending sales were negative YoY by -2.1%, although they were up month over month for the fifth month in a row.

In summary, through July 2014:

• Permits are down -0.9% from their October 2013 high, but up +12.6% from their January 2014 low
• Starts are down -1.1% from their November 2013 high, but up +21.9% from their Januay 2014 low
• New home sales are down -9.8% from their January 2013 high, but up +2.2% from their March 2014 low
• Existing home sales are down -4.3% from their July 2013 high, but up +12.2% from their March 2014 low
• Pending home sales are down -2.1% from their June 2013 high, but up +12.4% from their February 2014 low

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Even with the overall July increase, single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction.

Prices

 The Case Shiller 20 city index for July showed an actual decline from May and June.  By this important measure, prices have actually already made an interim peak:

Median prices for new homes (red) and existing homes (blue) are not seasonally adjusted, so I am showing their YoY% change, which shows continued marked deceleration in price gains.  Note that YoY comparisons lag seasonally adjusted month over month comparisons:

It is likely that we have seen an interim, seasonally adjusted price peak in housing.  It should decline for awhile before bottoming, as sales have already bottomed.

Inventory

With housing prices still increasing YoY, even if they are near or at or slightly past their seasonally adjusted peak, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.


In summary, through July 2014:

• 1. Lower interest rates have revived sales from their trough earlier this year. At the same time, because interest rates are still higher than they were several years ago, I am not expecting a renewed boom in sales.
• 2. As shown by the Case Shiller Index, prices hit an interim peak earlier this summer.  Because the lower interest rates are already feeding through the system, at this point I am expecting only a slight decline, or more generally a period of stable prices.

As I have noted a number of times in the last month, the biggest issue in the second half of this year is how much interest rates go down, and whether the decline is transitory or persists.  New housing sales are very important to the economy, and tend to feed through the entire economy over the course of a year or more.  For now, the trend is in the right direction.

2Q deflated corporate profits, real residential spending add to caution about 2015

- by New Deal democrat

I have a new post up at XE.com, discussing several important datapoints from this monring's revisions to second quarter GDP.

The remainder of 2014 still looks good, but there is at least one additional reason to remain cautious about 2015.

No matter how you measure, wages have stagnated

- by New Deal democrat

We have a variety of economic data series to track wages, including measures of average wages, median wages, and wages per unit production hour. There are at least 7 such measures.

In addition to the monthly average hourly pay report (listed first below), there are 4 quartely series:

• The most  commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full time workers each quarter. 
• The BLS also measures the Employment Cost Index quarterly.  
• The BLS also measures "business sector real compensation per hour" quarterly. 
• Another quarterly measure is unit labor costs, which measure how much labor gets paid per unit of output.

There are also two annual series:

• The BLS reports occupational employment statistics which are reported annually.  
• Additionally, the Social Security Administration measures annual net compensation from actual W-9 tax withholding forms, but this has only been issued through 2012.  This method means that the result is subject to change based on the total hours worked (remember that in the recession we lost 6% of jobs, but almost 10% of aggregate hours).  

Let's take a look at all of them.

The first graph, below, tracks monthly average (mean, not median) hourly wages (green), median wages from the employment cost index (red), and unit labor production costs (blue). All are adjusted for inflation using the CPI.  Since the quarterly index of median wages only started in Q1 2000, I have normed the indexes to 100 at that time:

As you can see, real average wages have risen fitfully, mainly reacting to the price of gas). Median real wages have essentially been flat for 10 years. This is certainly not what I would call good, given all the productivity gains during that same period. You need consumers to have the money to buy, before real growth in selling picks up as well.

Speaking of productivity gains, here are unit labor costs (i.e., how much labor does it cost to produce one widget) through the second quarter of 2014:

But since the price producers have charged for widgets has changed over time (in other words, is it really a labor gain if labor costs 2% more per widget, but the producer charges consumers 4% more per widget?), here are real unit labor costs adjusted by inflation:

This tells quite a different story.  The share of payments to labor has not kept up with the real price of production -- which is the flip side of record corporate profits.

The remaining 4 measures do not come with graphic presentations either by the BLS or the St. Louis FRED.  So I will provide them in a table, below.

Two of the remaining series uses tax return data.  Once a year, the Social Security Administration reports on the median salary of those who pay into it via their withholding taxes.  Secondly, every year the BLS reports on mean and median hourly wage rates for a panoplay of "occupational employment," and also give the average and the median for the aggregate sample. The most recent report, from this April,  reported on the data as of May 2013. The below table gives the median wage, adjusted by the CPI.

A third measure in the table below is the quarterly measure of "usual weekly earnings" of wage and salary workers. That report only goes back to 2004.

To reiterate, all of these are adjusted for inflation:

Year	Social Security		Usual weekly earnings	Occupational Employment
1999	27,164		---	---
2000	27,374		---	---
2001	27,713		---	16.78
2002	27,784		---	16.95
2003	27,657		---	16.91
2004	27,903		332	16.80
2005	27,331		333	16.71
2006	27,832		335	16.80
2007	27,984		345	16.70
2008	27,468		342	17.22
2009	27,584		337	17.12
2010	27,382		335	17.13
2011	26,963		337	16.86
2012	27,413		335	16.71
2013	---		333	16.63

 While two of the above 3 measues are annual, "usual weekly earnings" is updated quarterly, so here is a more detailed look at that measure through the second quarter of this year:

2013 Q1  332
2013 Q2  334
2013 Q3  333
2013 Q4  334
2014 Q1  336
2014 Q2  330

If you are keeping score, among the median measures, that's a decline from peak to trough is -3.6% for Social Security, -4.3% for usual weekly wages, -3.4% for Occupational employment, and -2.6% for the Employment Cost Index.  Average hourly wages declined - 2.6% from 2009 to their trough in 2012.  The big, nearly 2% decline in second quarter 2014 of usual weekly earnings is certainly surprising. Since it goes against all of the other monthly and quarterly series, I am inclined to think it is just a case of an outlier panel.  We'll see when 3rd quarter results are posted in October.

The bottom line is that, since the turn of the Millenium, real median wages - no matter how measured -  have stagnated. Gas prices caused them to rise during the recession, and then decline thereafter as the effects of those gas prices filtered through the economy. 

The jury is out on whether that decline has ended. Some measures suggest that real wages bottomed in late 2012 or early 2013.  Others suggest that the decline may have continued at least slightly since then.

No matter which measure you use, the fact is that American labor is still not sharing in the fruits of its productivity.

Draghi's Austerity Defense Rings Hollow

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/draghis-austerity-defense-rings-hollow

This Week's Germany News Has Been Concerning

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/weeks-news-germany-not-encouraging

A thought for Sunday: it is time for Judge Griesa to cease and desist

 - by New Deal democrat

It's Sunday, so I get to stray from posting economic data, and editorialize....

As most readers of this blog are probably aware, there is contentious litigation in the Southern District of New York Federal Court between several "vulture" funds, and the country of Argentina.  In a nutshell, when Argentina was forced to unwind its 1990s currency peg to the $US in 2001, it swapped old bonds for new bonds, but agreed to the jurisdiction of US courts in any litigation over the new bonds.  Over 90% of the old bondholders eventually went along, but some bondholders sold their rights to "vulture" funds which insisted on being paid in full.  In the ensuing US litigation, the US District Court in New York City agreed with the vulture funds.

The 83 year old senior judge handling the case, Judge Thomas Griesa, however, has gone well beyond making a legal ruling as to who owes whom how much.  He has issued injunctions ordering banks anywhere in the world  not to allow payments by Argentina on any debt unless it pays the vulture funds in full.

This egregious extra-territorial extension of claimed jurisdiction is bad enough, but if the following statement reported by Reuters  on Thursday is true, then in my opinion Griesa has finally stepped way over the line separating Judicial resolution of litigation, and the foreign policy of the United States:

"Griesa said proposed legislation announced on Tuesday by President Cristina Fernandez would violate orders he imposed favoring creditors who refused to accept restructured bonds following the country's 2002 default on $100 billion in debt.""It is illegal, and the court directs that it cannot be carried out," Griesa said at a hearing in New York."

I don't remember Judge Griesa being made the King of Argentina. Let's be clear here:  the new law passed by Argentina may violate the terms of its bond swap, and it may violate the orders of Judge Griesa in the US.  But for a US judge to be claim that a law passed by another country is illegal, and may not be obeyed, is a breathtaking usurpation of executive authority, and an imperial arrogation of Sovereignty over a foreign country.

To understand how outrageous this is, swap out Argentina for a country with more power.  Imagine a US judge Ordering that a law enacted by China, or Russia, or the EU, is "illegal" and may not be obeyed. To say that the blowback against the US would be significant would be an understatement.  The blunt truth is, the only reason Griesa can take this position is that Argentina doesn't have the military power to extract a price. Doesn't that sound like a decision that the Executive, not a low level judge, should be making?

I also don't buy that "Argentina" has made its bed, and now must sleep in it.  A corporation, faced with a similar issue, could simply wind up operations and its shareholder start a new corporation from scratch.  Countries can't do that.  And Argentina in 2015 is literally a different population from Argentina in the 1990s or 2001.  Demographically, its median age is 30, meaning an absolute majority of Argentinians were not of voting age in 2001, let along the 1990s, and about 15% of its population wasn't even born in 2001!  So the coercion being inflicted by Judge Griesa falls largely upon individuals who cannot bear any moral responsibility for the decisions made by former governments.

Judge Griesa has done quite enough damage already. He has now vastly overstepped the proper  authority of a US court, by effectively declaring himself the omnipotent Sovereign over another country.  It is time for him to cease and desist, or to be made to cease and desist by the Obama Administration.

International Round-Up

Over at XE.com

International Week in Review

International Preview for August 24-29