John "Trillion Dollar Loss" Hinderaker Attempts Economic Analysis; Fails

In case you're wondering, John Hinderaker was one of the many people who said the Fed's policies would lead to hyper inflation and spiking interest rates.  Bloomberg calculated the net investment returns a Hinderaker portfolio would have earned and came up with a net loss of $1 trillion.  Hence, from here on out, I will refer to Hinderaker as Mr. Trillion Dollar Loss of Mr. TDL for short.

Now we have Mr. TDL using Senate Republican slides to demonstrate how bad things are.  As you might guess, they are extremely misleading.

Let's start with this:

 
Notice very carefully the starting date for the graph: 2005.  Yet just a few weeks ago, Hinderker posted a more complete graphs of the same data:

As I wrote at the time:

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.

Notice that Hinderaker's hero Bush also had a drop in median income.  Interesting that nothing was mentioned about that.

And then there is this:

Obama is no Reagan!  Of course, this is also a misleading graph.  I'll let Barry Ritholtz explain why:

Consider an ordinary recession: The economy begins to heat up as wages rise and consumers borrow and spend. The Fed, concerned about increasing inflation, raises interest rates. As credit becomes more expensive, sales slow, putting the economy at risk of slipping into a recession.

But fear not! After six months or so, the Fed then lowers rates, unleashing all that pent-up demand. Consumers and businesses begin spending again, folks get hired and the entire virtuous cycle begins anew.

That approach is what we have seen in the 15 or so post-World War II recession-recovery cycles. An overheating economy leads to rising rates leads to a slowdown leads to falling rates. Rinse, lather, repeat.

That isn't what occurs after a credit crisis such as the Great Recession. Assets purchased with cheap and widely available credit become worth significantly less once the bubble bursts. But the debt remains. All of that leverage used to purchase all of those assets -- regardless of whether it's subprime mortgages or dot-com stocks -- sticks around.

Hence, a post-credit-crisis recovery is dominated not by the release of pent-up demand, but by massive corporate, household and government deleveraging. Even before the financial crisis, Reinhart and Rogoff were detailing how and why recoveries from such events were such slow, protracted and painful affairs.

It's an apples to oranges comparison.  

Ol' "Trillion Dollar Loss" Hinderaker fails again. 

SPYs and DIAs are Getting Near Key Support Levels

Both the SPYs and DIAs have strong, nearly year long trend lines in place.  Current price action has placed prices very near to these levels.  Should prices break through these levels, the next price target would be the 200 day EMAs.

The unemployment rate as a leading indicator for wage growth

 - by New Deal democrat

One of the most pronounced issues in the US economy generally is the stagnation of wages since the turn of the Millennium, and specifically the lack of wage growth since the current economic expansion began over 5 years ago.

Several months ago I undertook to explore whether there were one or more leading indicators for wage growth.  While I have not found any Holy Grail, the exercise has begun to bear fruit.

In this post, I'm going to explore nominal wage growth.  Because most employers probably determine raises without reference to the inflation rate, and partly because raises are usually only given once a year, nominal wage growth is much less subject to noise than real wage growth.  This makes it easier to distill signal from noise.  I'll deal with real wage growth in one or more subsequent posts.

Here's what I'll show in this post:

• nominal wage growth makes a good "mid-cycle" indicator
• the unemployment rate typically makes tops and bottoms months before nominal wage growth
• the exception, following severe recessions, is where the unemployment rate peaks at a number higher than 8%.  In those cases nominal wage growth has bottomed when the unemployment rate has fallen to about 7.5% +/-1%.

This rule allows us to make useful predictions.  I'll test the rule with a forecast at the end of this post.

To begin with, I have been looking for some worthwhile "mid-cycle" indicators, i.e., data series that typically have an inflection point about midway through an economic expansion.  The YoY% change in nominal wages appears to be such an indicator.

Here are nominal wages from 1965-83:

and here they are from 1984 to the present:

In each case, there has been a sudden surge in nominal wage growth of about 2% close to the midpoint of the economic expansions.  In other words, there are no false negatives.  Further, there are only 2 false positives, in 1974 and 1976.  Since we had a turnaround and a 2% gain that began in mid-2012, that suggests that late 2012 was close to the midpoint of this economic cycle.

But more importantly, I want to be able to forecast whether or not we can expect improvement in wages going forward.  Since nominal wage growth appears to have an inflection point near mid-cycle, I wondered if a normally lagging indicator like the unemployment rate might be a worthwhile leading indicator for wage growth.  It turns out that it is.

In the below graphs, the unemployment rate is in blue, and is inverted, so that post-recession peaks show as downward spikes.  Expansion lows in the unemployment rate are broader affairs and show as rounded peaks.  Average hourly earnings are shown in red. I've normed the series for relative ease of viewing, particularly in the case of the inflationary 1970's.

Here is the unemployment rate compared with average hourly earnings for 1965-1983:

and here it is from 1984 to the present:

These show that the unemployment rate peaked before nominal wage growth bottomed in 5 of 7 cases.  Similarly the unemployment rate bottomed before nominal wage growth peaked in 5 of 7 cases. The worst contrary result was only -7 months.

Next, note that the unemployment rate is subtracted from 7.5.  This means that a declining unemployment rate from, e.g., 9% to 6%, shows as a rising line crossing 0 at the point where the unemployment rate is 7.5%.  Of the three cases (1974, 1982, and 2008) where the recession peak in unemployment was worse than 7.5%, nominal wage growth bottomed when the unemployment rate was 8.4% (1975), 7.0% and 6.6% (two months in 1986), and 8.1% and 7.8% (two months in 2012).  This gives us a rule of thumb that all it takes is for the unemployment rate to fall to 7.5% +/-1% to generate sufficient tightness for nominal wage growth to begin to rise.

As I said at the beginning of this post, the relationship is consistent enough to be able to generate useful forecasts.  Since we know that (1) initial jobless claims lead the unemployment rate, and these have still been improving over the last 6 months; and (2) nominal wage growth generally does not peak until after the unemployment rate has made its expansion bottom; then (3) over the next 6 months or so, we should expect nominal wage growth to continue to rise, and make a new YoY% high for this economic expansion.

That's my prediction.  We'll see if it pans out or not.

Markets Are Breaking Down

 

 

The transports have broken through a year long trend line with a decreasing MACD.  There is also the increase in volume on the sell-off.  

 

 

The Microcaps have broken through support and are moving lower, printing stronger bars on increasing volume.  Also note the increasing volatility.

 

 

The Russell 2000s are approaching long-term support.  Today's sell-off was on increasing volume with increasing volatility. 



Sadly, Ed Yardeni is the Wanker of the Day - wage stagnation edition

 - by New Deal democrat

Dr. Ed Yardeni has some clickbait up at his blog titled, The Wage Stagnation Myth.

Yardeni is a highly-regarded financial markets analyst, but this is just sad.

He writes that

There is a widespread myth that real incomes have been stagnating for many years.  That's apparently true based on real median income for households.... [but]

real pre-tax compensation per payroll employee (including wages, salaries, and supplements) is up ... 16.8% since the start of 2000.

Real wages and salaries in personal income is ... up 14.6% since the start of 2000.  Real average hourly earnings of production and nonsupervisory workers i sup ... 13.4% since the start of 2000.

 In the first place, like so many others, he starts by conflating wages and income, setting up a straw man.  No, Dr. Ed, the fact of wage stagnation is not based on income metrics, but on wage metrics.  To give you a head start, here are 7 of them I helpfully catalogued in a post only one month ago.

Secondly, note that all of Yardeni's metrics appear to be mean, not median, measures.  You remember the old saw about Bill Gates walking into a bar, and now the mean wealth of the patron is $1 billion.  That's what Yardeni does. When you measure in median, not mean terms, wage stagnation is blazingly apparent.

The only measure he cites which might possibly be a median measure ("real pre-tax compensation," he doesn't name the data series), includes "supplements." Whether these are management bonuses or e.g., health benefits, they hardly are contrary evidence.  We know that health cost inflation has soared for several decades.  That companies may have picked up some of these has nothing to do with actual wages.

That a premier Wall Street analyst is so blind to the blazingly bright evidence is, sadly, not shocking at all.

Housing sales and construction show slight improvement to stagnation

 - by New Deal democrat

I have a new post up at XE.com discussing this month's housing sales and construction releases.

There is a very slight uptrend, but by and large, the market has stagnated. I also comment on what I expect in the next 6 months or so.  Housing is crucially important, because more than anything else, it forecasts the economy 12-18 months out.

US Market Review For The Week of September 22-26

     The market is most likely consolidating gains with a downside bias targeting the respective long-term trend lines for the SPYs and QQQs.  Supporting the consolidation argument is the sideways movement of the IWMs as they trade between the 106/107 level on the lower end and the 119/120 level on the top end.  They have been in this range since mid-Spring which attests to its overall importance.  Also supporting the consolidation conclusion is that the SPYs and QQQs are still meaningfully above their respective long-term trend lines.   

 

The overall uptrend of the SPYs remains very much intact, with a strong trend line connecting the October and early February lows.  But September was a tough month.  Price broke through the 200 level, topping out at 201.90, but have since moved lower, although in a disciplined manner.  Prices are currently sitting at the 50 day EMA, but the MACD is giving us a sell signal and prices are weakening.

Then there is the IWM chart, which was consolidating between two price levels -- the 106/107 for the lower prices and the 119/120 level for the upper.  But within that consolidation prices were forming a symmetrical triangle.  But last week they broke through the lower trend line.  With a negative MACD and rising volatility, I'd expect this downside move to continue, at least to the 106/107 level of support.

The IWMs downside move has been telegraphing this move lower for the last month.  Notice that prices formed a general downward sloping channel starting at the beginning of the month.  Prices continue to print a series of lower lows and lower highs until prices couldn't keep the upside momentum going on the morning of trading on September 20th.  Prices gapped higher at the open, but then slid below the 200 minute EMA.  Since then prices have been using the 10, 20 and 50 minute EMA as resistance points while also dragging the 200 minute EMA lower. 

The SPYs show a similar pattern.  Prices gapped higher on the 19th, but they quickly moved lower.  On Monday, prices became entangled in the 200 minute EMA eventually moving lower.  And although prices moved higher on Thursday, closing at session highs, they gapped lower at the open on Thursday and quickly printed strong downward bars.  Overall, the last week's price action is bearish. 

And finally we have the QQQ daily chart, which, like the SPYs chart, shows an index that is clearly in an uptrend.  Back of the envelope calculations indicate it would need to move lower by almost 7% to hit the long-term trend line.  But, the chart also has weaker underlying technical with the MACD moving lower, weakening relative strength and a decreasing CMF.        

Weekly Indicators for September 22 - 26 at XE.com

 - by New Deal democrat

This week's post is up at XE.com.  A little more deceleration from summer's strongly positive data is evident.

Final revision 2Q GDP: 4.6%: you're reading the right blog

 - by New Deal democrat

As you probably already know, 2Q GDP was revised higher again, to 4.6%  This equals the best quarterly reading since the economic recovery began 5 years ago.

Back in June I wrote that the strong rebound in the Weekly Indicators I track were forecasting such a result:

Now here is a thought experiment:  what if Q2 YoY GDP reflects that same trend? ....
....If Q2 is up only 2% YoY from Q2 2013, that will be $15.99, a +1.1% increase from today's Q1 number, or +4.4% q/q annualized.  If it were to return to the increasing trend line of +1.33% quarterly real growth from the prior 3 quarters of 2013 it had before Q1 2014, that would be $16.31, a +3.1% increase, or +12% q/q annualized!!! (not gonna happen, but worth pointing out). 

By no means do I claim any expertise in calculating GDP, but if the strong YoY readings I have seen in the last couple of months in my weekly column show up in Q2 GDP, then I wonder if a +4% or even +5% Q2 GDP is in the cards.

 So, as I say from time to time, you're reading the right blog.

A couple of closing comments:  on the negative side, even with this revision, the average GDP growth for the first half of the year was only 1.25%.  On the positive side, when we track the YoY%
change in GDP growth, it appears that there has been a slowly rising trend since 2011:

It's still worth noting that before 2000, 3% or higher GDP growth was the norm.

Russell 2000 Continues to Underperform S&P 500

The chart above shows the ratio of the IWMs (Russell 2000) to S&P 500 (SPYs).  Since the beginning of the year, his ratio has been declining, indicating a declining risk tolerance on the part of traders.

New home sales best since 2008 -- until next month's revision

 - by New Deal democrat

I have a new post up at XE.com, about this morning's blowout new sales report, as of now the best since 2008.

Contain your enthusiasm, and bookmark this post for one month from now when the revisions come out.

ECRI recession call: unhappy three year anniverary

 - by New Deal democrat

(yeah, I know)

It has now been a full three years since ECRI announced that the US was "slipping into recession" "now" and in fact "it might have [already] started."  The full catalogue of ECRI's pronouncements can be found in my post one year ago on the two year anniversary of their epic faceplant.

Still, the quantitative and sequential long leading/short leading/coincident/lagging indicator approach they inherited from their founder, Prof. Geoffrey Moore is one of obvious merit. In 2011, they made the human error of reading the temporary air-pocket caused by the debt ceiling debacle as something more lasting.

Last year I made a plea that they consider a "recession 2.0" watch. That watch would be premised on the idea that, even if their existing call is wrong, the new data when it occurs will justify a recession call totally independnent of their pre-existing 2011 recession call. 

This is the approach ECRI seems to have adopted, no longer focusing on attempting to justify their 2011 call, but simply looking forward from the data now.  I approve.

Market Review Week of September 15-19

Historically, the market is not overbought, but is clearly expensive.  The S&P 500 PE ratio is 19.93 while the dividend yield is 2%.  And the price to book value is 2.81.  The PE ratio is pretty stretched above the median level (14.5 verses 19.4).  All of these numbers tell us what we pretty much already know: we're pretty far into this bull market; we're not going to find any cheap companies.

     The IWMs (Russell 2000) continues to be the index to watch for "real" market sentiment. 

The market has been consolidating since the Spring with a high in the upper 119s/lower 120s and low of 106s/107s.  In addition, a prices are consolidating in a triangle pattern, with trend lines connecting the lows of May and the highs of July.  The MACD his been trending lower since the July highs as well as has the RSI.  We need to see a strong move above the 120 level or below the 106/107 level to get a better read on what this market really wants to do.

And so long as we're on the IWMS, let's take a look at important moves in the 5 minute weekly chart, comparing the SPYs and the IWMs.

The SPYs were in an uptrend all week.  On several occasions they moved off the 200 minute EMA, using it as technical support.  The 200 minute EMA was in an uptrend as well.

 



 



 

In contrast, note the sharp sell-off in the IWMs on Friday, and compare that to the SPYs sell off.  The IWMs moved through the 200 minute EMA and continued lower until they were near the weekly lows.  Only then did they rally.  But the rally was only a bit stronger than a dead cat bounce, hitting resistance at the 50 minute EMA.  And, the 200 minute EMA  moved lower on Friday, in contrast to the SPYs.

 

Let's continue this comparison/contrast between the SPYs and IWMs by looking at the 30 day charts:

 

 

The 30 minute SPY chart can be broken down into two patterns, with the first being a price arc lasting for the first ~2/3 of the chart, as prices rose from the 197.25 level to the 200.6 level and then fell back to the lower 197s.  But last week, in anticipation of the Fed's statement, the market rallied for the better part of the week.  On Friday the market gapped higher, but then traded a bit lower.

 

 

 

Compare the SPY price chart to the IWMS, which have been in a downward trend printing lower lows and lower highs since the beginning of September.  This is a pretty disciplined sell-off, meaning the bull/bear balance is only slightly balanced towards the bears.  But it also indicates that risk appetite is weaker than we'd expect, especially if we're anticipating a stronger move higher.

 

Finally, let's look at the weekly SPY chart:

 

 

 

The overall annual uptrend is intact.  Prices consolidated over the past few weeks, but moved through upside resistance on Thursday.  The MACD is about to give a buy signal, and the RSI has room to move higher.  This chart is pretty bullish.  But remember the overall environment discussed above.  The market is expensive and there is clearly a diminishing risk appetite that will hold back gains.  Overall, we need more fundamentally bullish news such as corporate earnings growth, stronger employment numbers or overall GDP growth to keep moving consistently higher.    

 



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.