Three positive takeaways from 4th Quarter GDP

 - by New Deal democrat

Aside from the fact that it was positive, there were at least three particularly nice positives in the GDP report for Q4 2015:

1.  Real residential investment itself, and as a share of GDP, increased:

This typically turns down a year or more before the next recession.

2.  Proprietors' income increased.

No graph available yet, but income increased +0.6%.  Typically, but not always, corporate profits follow in the same direction.  Again, these tend to turn at least one year out from a recession.  I also suspect this series is more attuned to domestic consumption that corporate profits is.

3. Median wages increased:

These increased +0.6% and they are up over 2% YoY.  Since this is a median, this is a better measure than average hourly wages.  The worker at the 50th percentile is doing better.

Holy Cr*p!!! Apartment rents soar 5% in Q4 2015

 - by New Deal democrat

What happened to apartment rents in the 4th quarter was jaw-dropping.  My take is up at XE.com .

Meanwhile housing inventory remains very low, harming sales, as buyers simply cannot find affordable dwellings.  And homebuilders tout in their earnings conference calls about deliberately holding back supply in order to profit more.

Oligopoly market power, anyone?  Here is an apparent horrible example of average Americans suffering because of the complete abondonment of antitrust enforcement.

The big trends of 2015 look like they are abating

 -  by New Deal democrat

It's a slow week, with the big news coming on Friday with the release of Q4 GDP.

In the meantime, here are a few things to consider:

1.  In 2015, 5 things moved in lockstep: Chinese stocks, US stocks, oil prices, industrial commodity prices, all down, and the US$, up.  Those trends may be abating.

First of all, the Chinese stock market, which has been unwinding a bubble, has given back about 75% of its gain:

That's 2400 points down from the peak, about 800 left to give back the entire 2014-15 surge.  There's no guarantee the bottom will arrive at 1999, but that's not a bad target.

2.  Industrial commodities haven't retreated nearly as much as Oil:

These have gone more or less sideways since November.

Yesterday I pointed out that the spot index for the US$ is also up less than 5% YoY, for the first time since late 2014.

2.  Yay new home sales, but don't get too excited:

This series is heavily revised, usually away from an extreme high or low reading.  I suspect last February's high is going to hold for this cycle.

3.  While we might get a negative GDP print, the weakness in the economy is very concentrated.  The broader economy is holding up pretty well.  That's not a recession.

So says Prof. Tim Duy.  It's nice to have someone of such high status and academic credentials agree with my point of view.

Mixed news on the US$

 - by New Deal democrat

The strength of the US$ is the biggest reason why the US economy has been slowing down.  In general, any YoY increase of 5% or more in the US$ is a big negative for the economy in the following several quarters.

At the YoY peak, the broad US$ was up over 20%.  As of the Fed's update yesterday, the broad US$ is still up 10% or more last week, and it actually rebounded a little:

The good news is, as of today, the US$ spot index against major currencies fell slightly below 5% YoY to 4.8%:

Hopefully the broadly weighted US$ will follow suit, but we'll see.  For now, there is continued pressure on US exports.

A simple question: who is more likely to be right?

 - by New Deal democrat

Mom and Pop investors:

From April through Dec. 30 last year, mutual fund investors yanked money from mutual funds focused on foreign and domestic stocks, according to the latest estimates from the Investment Company Institute.

Corporate Insiders:

Weekly International, Bond Market and Equity Market Round Ups

International Week in Review

Bond Market Week in Review

Equity Market Week in Review

Weekly Indicators for January 17 - 21 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

There has been a rebound to "less bad" readings in a number of indicators, that may or may not be an artifact of year end - start of year seasonality.

Hoarding in plain sight 2016: the importance of Chinese stockpiling

 - by New Deal democrat

Back in 2008, I wrote an article called Hoarding in Plain Sight, making the argument that the tightness in oil supplies was crucially augmented by the decision of the Bush Administration to double the amount of Oil secreted in the Strategic Reserve, at the same time as other countries such as China also decided to start their own such storage facilities.

I suspect an opposite trend is in play now.  After all, very few analysts are taking the position that China's economy is actually contracting, rather than just growing at a lower rate.  If it's still growing, why wouldn't it be using even more commodities, increasing global demand?  A change in stockpiling behavior is an answer that fits the data.     

  

Let me give an example.  Suppose I am a user of commodity Q.  In Year 1 I made use of 1 million tons of Q, *and* stockpile another 250,000 tons.  In Year 2, with my economy growing, I make use of 1.05 million tons of Q, but I cut back on my stockpiling to 100,000 tons. 

What happens to the "end demand" for Q?  It falls.  In Year 1, I demanded 1,25 million tons of Q.  In year 2, I demanded 1.15 million tons of Q -- a decline of 100,000 tons.  

Something like this has happened to the world economy in the last few years.  From 2009 through 2013, China wasn't just growing strongly, it was stockpiling all sorts of commodities.  Here are some examples:

Metals

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.....China's refined copper imports have surged over 70 percent so far this year to 1.1 million metric tons, while demand from Chinese manufacturers was forecast to rise by up to 7 percent. Meanwhile, iron ore shipments have risen 6 percent, with traders reckoning that local demand growth is much lower.

Coal 

If you are looking for an example of China's economic slowdown, visit the country's biggest coal port.The huge stockpiles of coal are growing ever higher as factories and power plants cut back.

Fuel

CHINA, the world's largest coal producer and consumer, plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilise prices, the nation's top economic planner says.The province would complete the construction of four to six coal stockpile bases within the next three to five years, the National Development and Reform Commission said.The bases would each have a capacity to store more than 20 million tonnes of coal.

Aluminum

Majo r Chinese aluminium smelters met last Thursday in the city of Kunming, Yunnan Province, to agree on how to save the industry.While base metal prices all tumbled in the past year – with copper dropping 26% and nickel 40%, aluminium’s 20% decline means the industry is being hit hard by losses, whereas copper prices are still much higher than the cost of production. At the meeting, the Chinese smelters discussed plans for supply-side reform, production cuts and stockpiling, according to market participants. .... Rumours about stockpiling have been circulating widely in the market, with some saying that 2 million tonnes of aluminium will be stockpiled this time. According to the market talk, major aluminium producers, as well as some large-scale state-owned trading...

More on coal

 China and India [ ] from 2008 to 2013 accounted for 98% of the increase in world coal trade. In the rest of the world, exports and imports of the commodity declined over the same period.

The Chinese economy is opaque.  I do not know  whether it actually has declined, or slowed down, or simply cut back on stockpiling.  But to go back to the example I gave at the beginning of this article, "end demand," which includes both use *and* stockpiling, almost certainly declined.

This doesn't simply mean that suppliers now had to compete for reduced demand.  Because of the vast increase in Asian, primarily Chinese, demand, increased supply was also called forth.  The combination of increased supply and decreased end demand is a recipe for a commodity crash.

And all commodities, not just oil, crashed.  Here for example is the 5 year chart of the Bloomberg Industrial Metals Index:

That not just oil, but all commodities, crashed, pretty much in unison, is strong evidence that the causation went from weakened final demand to a decline in commodity prices, not the other way around.

The aforesaid is all speculation.  But a slowdown in Chinese stockpiling, if true, is a good explanation for why commodities are crashing in the face of a still-growing Chinese economy

A mixed report on December housing permits and starts

 - by New Deal democrat

Housing is the single most leading sector of the economy.  The record warmth in the Northeast in December just added to the difficulty in making a clean interpretation. My post sorting through the mess is up at XE.com .

The consumer is alright

  - by New Deal democrat

The negative deflation report for consumer prices in December confirms that the US consumer is alright, and workers' paychecks in real terms continue to grow.

In nominal terms, retail sales declined -0.1% in December. After adjusting for inflation, we now know they were flat: 

Further, December's decline of -1.0% in general merchandise sales, the 3rd worst in the last 5 years:

was almost certainly weather related, since nobody east of the Mississippi was buying winter goods as they basked in September-like warmth.

The average American is a worker as well as a consumer, and since nominal wages grew +0.1% in December, real wages grew +0.2% to a new 35 year high:

Aggregate real wages also grew,  and are now up +18.7% for this expansion:

[NOTE: That means that, 74 months from the bottom, aggregate real wages have increased more than either expansion in the 1970s, and also the 2000s.  This expansion lags the very strong 1960s and 1990s economies by a fair stretch, and is only slightly behind (by about 1%) the 1980s expansion.]

If there is a fly in the ointment, it is that YoY CPI inflation has gone from 0 to +0.7% in the last 3 months, meaning that YoY real wage growth decelerated in the second half of 2015:

So I don't want to overstate this.  We still have real problems with underemployment and sluggish wage growth.  But the average American is doing better now than they have in nearly a decade, and the consumer economy - 70% of the total - is simply not rolling over.

Has the energy bust helped or harmed average Americans?

  - by New Deal democrat

In the last week, we've seen an emergiing Doomer meme of, "See, we told you, the decline in oil prices has harmed the economy!"

Here's a quick question: would you rather have high commodity prices or lower commodity prices?  It's pretty clear that being able to run an economy on low priced goods is a boon.  That doesn't prevent the pain to commodity producers being concentrated in time, while the benefit to consumers is spread out over a longer time.  It's still a net boon.

And the fact is, average Americans have benefitted from the decline in oil prices.

First of all, here is employment growth measured YoY.  I've marked the month of June 2014 after which the big decline in prices began:

Outside of the last 2 reporting months, we had the best employment growth of the entire expansion coinciding with the big decline in energy prices.

Now let's take a look at real income (red) and spending (blue):

We've had some of the best income growth in the last 16 years due in large part to the decline in energy prices.  

But Doomers still point to the fact that income growth has outstripped spending, as consumers have saved at least some of their gas savings.  True enough, but let's zoom in on the last 5 years. Again, I've tagged June 2014 so it is easy to compare growth since the big decline in energy prices started:

The simple fact is, except for the last 2 months, not just income, but spending also has risen more during the energy bust than before it.

Yes, the energy bust has devastated the Oil patch, and the surge in the US$ has harmed producers in general.  But American families on average have seen their lot improve.

This is still just a commodities recession (with a side of climate)

  - by New Deal democrat

I've been ridiculing Doomers - who always and everywhere only see bubbles, if data is going up, and crashes if it is going down - ever since 2009.  I fully intend to continue doing that, but it is no falsehood to say that in right now they have their most reasonable case since that time.

A good and perfectly reasonable presentation of the recession case was made Friday by Wolf Richter, who pointed out that Industrial Production has declined to a point where it has with 2 exceptions always meant recession in the last 60 years. Here's the supporting graph:

But although industrial production may be something of a "first among equals" of the 4 recession indicators of production, sales, employment, and income, the fact remains none of the other 3 measures are in retreat (h/t Doug Short):

Nocie that it is only in the last two months that industrial productioin really gapped down - keep that in mind.

If we break out sales between wholesale and retail, we do see a downturn in wholesale sales, but retail is still OK (and as I pointed out Friday, real retail sales may only have gone sideways,not down, in December, and even if so, it is only one month and not nearly the downturn we saw in December a year ago.)

Further, as I pointed out Friday, manufacturing production may be going sideways, but it hasn't turned down:

In addition to manufacturing, industrial production also includes mining and utilities.  So here is mining:

This is the commodity sector, and it is absolutely horrrible, among the worst downturns in the last 50 years.

Now here is utilities:

Note these two were going sideways until recently.  How recently?  Here is a close-up on the last 5 years:

Remember what I told you about keeping in mind the last 2 months?  Well, the entire downturn in utilities has taken place in the last 2 months.

And in case you needed a refresher, the autumn months in the US were the warmest on record.  December broke even more records.  So utilities weren't exactly working at breakneck speed to churn out energy for heating.

A final way this is not like the 2001 manufacturing-led recession is that employment is doing pretty good:

There was a big downturn in employment from 2001-03 coinciding with the giant sucking sound of manufacturing jobs relocating to China.

The bottom line is, this remains a commodities recession only at this point. With an assist from climate. If January weather returns to normal, there will be a rebound.

Weekly Summation of International, Bond Market and Stock Market Activity

International Week in Review

Bond Market Week in Review

Stock Market Week in Review

Weekly Indicators for January 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

The monthly data reported yesterday, which so jarred the market, was apparent in the weekly data as the deterioration in coincident indicators intensified throughout the 4th quarter.  So what is it doing now?

I interrupt this Doomgasm

  - bby New Deal democrat

To put a little perspective on today's economic news, remember that 3 of the 4 reports primarily reflect what is happening with producers, not consumers.  It has been increasingly obvious for 3 months in the weekly data on shipping, steel production, and rail transport that this sector of the economy has gotten significantly worse.

Yet the same weekly data has shown consumers holding up.  Consumers represent about 70% of the economy. Nominal retail sales were down -0.1% in December.  The Briefing.com consensus for CPI is also -0.1%, meaning that real retail sales are likely to be flat for the month.

And how bad is that?  Here is the last year of real retail sales (blue) and real PCE's (red):

We have had much worse readings, including December 2014.

Now here are the same two measures going into the 2001 recession:

and the 2008 recession:

Even with today's negative number, the comparison isn't nearly so bad.

So today's numbers don't fundamentally change the dynamic.  The industrial economy is awful.  The consumer economy -- 70% of the total -- is meh, but positive.

Sent from my iPad

A "quadfecta" of important economic news

 - by New Deal democrat

Today sees 4 important data releases: retail sales, producer prices, industrial production, and total business sales and inventory.

Retail sales, as expected after the punk December auto sales, were negative.  Aside from gas, clothing sales also declined (thank you global warming!).  Unless the CPI is negative (which is possible), this means a real retail sales decline from November's post-recession high.

Anything that suggests that the services sector is turning is soft is very unwelcome, but it is still only one month.

Producer prices, on the other hand, were a slight positive in my reading.  That's because deflationary busts end when YoY deflation bottoms - and we have 100 years of producer commodity prices in support of that argument, as I pointed out yesterday.

While producer prices did decline, they didn't decline nearly as much as they did 12 months ago, so here is what the YoY% change in producer prices look like:

We haven't broken out of the 2015 YoY range of declines, although relatively speaking this was the "least worst" reading in 6 months. perhaps slight evidence that the global slowdown might be in the process of bottoming.

Industrial production of course was also bad, but was most noteworthy is that manufacturing declined slightly, and November's advance in manufacturing was also revised away, meaning the peak in manufacturing was in October.  Here's the graph of overall industrial production (blue) compared with manufacturing (red):

My template is the 2001 business led recession.  Industrial production as a whole is now down nearly as much as it was at the outset of that recession.  The silver lining is that it is almost all utilities and mining (oil!).  This is not so much of a broad based downturn so much as a general stall and a horrendous downturn in specific sectors.

Finally, we got a very limited piece of "good news" (in the sense of having an infected tooth pulled) is that while sales declined,  business inventories declined even more in November, and October was also revised to a negative number: 

This may push Q4 GDP all the way to a negative number.  But we need excess inventories to be liquidated, and that is only going to happen if inventories go down.  So this is telling us that we are beginning to actually work through the problem.

Yesterday in my forecast for the first half of 2016 I wrote that the slowdown is probably going to bottom out by spring.  But today's releases mean the *now*-cast is that the economy at the end of 2015 was a hairbreadth away from recession.

My forecast for 1H 2016

 - by New Deal democrat

This is up at XE.com .

As usual, I am not being a trend-follower.  Rather I am trying to anticipate where the trend will be (to paraphrase hockey great Wayne Gretzky)

JOLTS, Labor Market Conditions update

 - by New Deal demorat

In the last few days, the Labor Market Conditions Index and JOLTs data have given us a more detailed look at the jobs market.

The Labor Market Conditions Index is a good leading indicator for the YoY growth in jobs.  It has been positive, but abysmally so, for most of the last year.  The November data, just released, is the best of this poor lot:

This suggests to me to expect a marked slowdown in job growth in upcoming months -- at very least not so good as early 2015.  But it also is not negative, and so not consistent with imminent recession.

The JOLTS is a study in sharp contrasts.  First, here is a comparison of job openings (blue) and hires (red).  We only have one compete past business cycle to compare this with, so lots of caution is required, but in that cycle, hires peaked first and then openings turned down in the months just prior to the onset of the Great Recession:

Which is what we are seeing now.

On the other hand, quits made a new post-recession record:

This does not suggest anything imminent.  Note, I am discounting the 2001 spike at the far left, since we have no idea whether the data before that spike would have been higher or lower.

Overall, this still looks like a late cycle slowdown, but not an actual contraction.

South Carolina's best attribute

 - by New Deal democrat

Really, really, REALLY cheap gas:

Shame about their school systems and infrastructure though.

Traveling man

 - by New Deal democrat

Yesterday and today are traveling days. To tide you over, here is your quick summary:

1. The Oil patch, and that portion of the industrial economy that is globally exposed, really really stink.  They are in recession and it has deepened.

2.  The services economy is doing OK.

Here's a 5 year graph of the US$.  Compare the last year with the last six months of 2014:

Despite the stock market breakdown, and the further decline in commodities, the US$ - responsible for all that badness in #1 above -  has not broken out of its 2015 range (yet!).

That is all for now.

Week US Equity, US Bond and International Economic Round-Ups

US Equity

US Bond

International 

Weekly Indicators for January 4 - 8 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

Coincident indicators are at recessionary levels, but there is some interesting action happening at the margins, suggesting a turning or inflection point may be forming.

Five graphs for 2016: #1, underemployment and wages

 - by New Deal democrat

This is the final installment of my 5 graphs to watch in 2016.  Previously I have described:

#5.  The yield curve
#4.  The trade weighted US$
#3.  The inventory to sales ratio
#2.  Not in Labor Force, but Want a Job Now

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, nominal increases have averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power.  This is shown in red in the graph below:

There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers. This expanded "U6" unemployment rate is shown in blue in the graph above.

In the above graph, both YoY nominal wage growth and the U6 underemployment rate are normed to their most recent values from the November employment report.

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  If the economic expansion continues, the U6 unemployment rate should continue to decline, and I would expect to see increasing wage growth.

I am especially fearful that poor wage growth now may mean actual wage deflation - for the first time since the 1930s - when inevitably the next recession occurs.  This is thus the most crucial graph of all, and it is the #1 graph to watch in 2016. 

December jobs report: a solid report with few blemishes

- by New Deal democrat

HEADLINES:

• 292,000 jobs added to the economy
• U3 unemployment rate unchanged at 5.0%

With the expansion firmly established, the focus has shifted to wages and the chronic heightened unemployment.  Here's the headlines on those:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 249,000 from 5.637 million to 5.886 million
• Part time for economic reasons: down -63,000 from 6.085 million to 6.022 million
• Employment/population ratio ages 25-54: was unchanged at 77.4% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.02 from $21.20 to $21.22,  up +2.4%YoY. (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

October was revised upward by 9,000.  November was also revised upward by 41,000, for a net change of 50,000.

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

• the average manufacturing workweek declined from 41.7 hours to 41.6 hours.  This is one of the 10 components of the LEI and will be a negative.
 
• construction jobs increased.by 45,000.  YoY construction jobs are up 263,000.  
 
• manufacturing jobs increased by 8,000, and are up 30,000 YoY.

• Professional and business employment (generally higher-paying jobs) increased by 73,000 and are up 605,000 YoY.


• temporary jobs - a leading indicator for jobs overall increased by 34,400.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - fell by 7,000 from 2,412,000 to 2.405,000.  The post-recession low was set 4 months ago at 2,095,000.

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

• Overtime was up 0.1 hour from 3.2 hours to 3.3 hours.


• the index of aggregate hours worked in the economy rose by 0.3% from  104.3 to 104.6. 
 
• The broad U-6 unemployment rate, that includes discouraged workers was unchanged at 9.9%. 

•  the index of aggregate payrolls rose by 03%  from 125.7 to 126.0.

Other news included:      

• the alternate jobs number contained in the more volatile household survey increased by 485,000  jobs.   This represents an increase  of 2,490,000  jobs YoY vs. 2,650,000 in the establishment survey.  
 
• Government jobs rose  by  17,000.  

• the overall employment  to  population ratio for all a ges 16 and above rose by .1 to 59.5  m/m and +0.3% YoY.  The labor force participation rate rose 0.1% from 62.5%  to 62.6%  and is down -0.1% YoY (remember, this incl udes droves of retiring Boomers).  

 SUMMARY:  

This was a solid report with just a few blemishes. Job increases were across the board, even in manufacturing.  Average wages were up, and are now up +2.4% YoY, the best in several years.  Aggregate hours and wages increased solidly. Revisions were positive.

The blemishes were sideways unemployment and participation, the decline in the manufacturing workweek, and the increase in those outside of the labor force who want a job, as well as the deceleration in YoY job growth.

I caution against reading too much into the YoY wage increase, since what really happened is that the miserable -0.6% decline in December 2014 dropped out of the YoY comparison.  The decline in YoY job growth, confirming that we are late in the expansion, together with continued objectively poor underemployment, should be taken as serious issues.  I can't emphasize how much I am worried about outright wage deflation, with all that implies, whenever the next recession hits. 

Five graphs for 2016: #2, discouraged workers

 - by New Deal democrat

This is the 4th installment of 5 graphs to watch in 2016.  So far I have covered:

#5.  The yield curve
#4.  The trade weighted US$
#3.  The inventory to sales ratio

Number 2 is a carryover from last year.  While 2015 saw a big improvement in involuntary part time employment, which hopefully will continue, the number of those so discouraged that they did not even look for work, even though they want a job, went stubbornly sideways until the last quarter of 2015.  It is still elevated well above its rate in the later part of the 1990s through 2007:

If the economic expansion continues, this number should improve, as more and more of these discouraged workers re-enter the labor force and actively look for, and hopefully find, work.  I would like to see at least 3 months of numbers below 5.2 million before concluding that this number is no longer "poor."

A brief note on the markets

 - by New Deal democrat

I am writing this note primarily for our progressive readers who follow us from That Other Place.  With the Chinese stock market tanking again overnight, one thing that is nearly certain is that there will be a collective Doomgasm from the usual suspects.  The ones who dismiss the stock market when it goes up, because it is a casino, stocks are overwhelmingly owned by plutocrats, it's a bubble, blah blah blah; but are in steamy arousal when the market goes down, because this is The Big One!  Is there a legitimate basis for concern?

Concern, yes.  DOOOM, no.

My sense of the current volatility is that it is similar to last August.  China is unwinding, in somewhat amateurish fashion, a stock bubble, as prices on the Shanghai Exchange more than doubled between late 2014 and early 2015:

That unwinding almost always leads for forced selling, as those who have been caught on the wrong side of stock price movements have to sell to cover their bets.  They will "sell their winners," i.e., assets which are more liquid and less affected -- the perfect example of which are US stocks.  In August, this selling reached a crescendo with a 15 minute 1000 point drop in the Dow that caused astute domestic traders to back up the proverbial truck and buy.  The best gauge of this better informed local investor is to watch corporate insiders.  Here's what they've been doing in the last year:

In case it hasn't already leapt out at you, it is nearly a mirror image of the Shanghai index over the same period.  As of the most recent week, US corporate insiders are very bullish on their own companies' stocks - just as they were during the brief August downturn.

So can we have another big mini-crash like we had last August?  Sure.  Does it mean the US economy is sinking under the waves?  Almost certainly not.

That being said, the US economy is holding its own, but it has taken on some water in the form of a shallow industrial recession, that is partly the OIl patch, and partly the due to the huge strengthening of the US$, harming exports and making imports more competitive.  [NOTE: the decline in gas prices is a net boon to the US. But this time it was accompanied by a surge in the $, which has had the larger effect.]

The biggest danger from China is that it aggressively devalues the Yuan against the US$. causing another upward surge in the dollar's trade weighted value.  At some point a hyper-strong dollar would affect manufacturing so badly that it can outweigh the still-positive US services economy, as shown in yesterday's ISM non-manufacturing index.  But we are not there yet, and it is far from certain that we get there.

Five graphs for 2016: #3, the inventory to sales ratio

 - by New Deal democrat

This is the third installment of 5 graphs to watch in 2016.  The first two were:

• the yield curve
• the trade weighted US$

One consequence of the recently strong US$ has been a shallow industrial recession.  This is been accompanied by a relative buildup in inventories compared with sales:

The current level of the inventory to sales ratio has sometimes but not always indicated a recession.

I plan on looking at this ratio decomposed into its two components:  sales (blue) vs. inventories (red):

This is because sales peak/trough first, and inventories catch up with a lag.  For the last few months, inventories have gone sideways, even as sales have continued to slide.  In order for the buildup to be liquidated, inventories must turn down.  That will most likely be accomplished by a significant cutback in production - with nasty consequences for some important economic numbers like employment (but not necessarily a downturn vs. a slowdown).

So I will be watching for two things: (1) a downturn in inventories, indicating the liquidation is underway; and (2) a bottoming of sales, indicating the inventory correction is over.

An important look at corporate profits

 - by New Deal democrat

I have a new post up at XE.com .  If corporate profits are a long leading indicator, and stocks a short leading indicator, then corporate profits should lead stocks.

But even if you don't particularly care about stock prices, if you care at all about social equity, then a look at corporate profits as a share of GDP is, well, breath-taking.

Five graphs for 2016: #4, the trade weighted US$

 - by New Deal democrat

This is the second of 5 graphs to watch in 2016.  Yesterday I wrote about the yield curve.

The big story of last year was the impact of the super-strong US$, which rose 20% against some major trading partners between July 2014 and February 2015, generally trending more sideways since:

The result was a downturn in industrial production, creating a shallow industrial recession, which to date has been overbalanced by a continuing expansion in the domestic US consumer-driven economy, led by housing and cars.

Has the strengthening of the US$ run its course? Or will tightening by the Fed drive the value of the US$ even higher, perhaps enough to overcome the service sector?

Here is the graph I will be watching:  the YoY% change in the trade weighted US$ (blue) vs. the YoY% change in industrial production (red):

As you can see, industrial production tends to move inversely to the US$, with a slight lag.  The effects of a big move tend to dissipate after a year or so of stability.  If the US$ stabilizes in 2016, so most likely will industrial production.  If the US$ continues to strengthen, the industrial recession will deepen, possibly overwhelming services.

Five graphs for 2016: #5, the yield curve

 - by New Deal democrat

Every year there are certain aspects of the economy that particularly bear watching.  This week I will illustrate 5 graphs that describe particular issues facing the economy that are unusually important at this time.  Several of these will be carryovers from last year, but most will be new.

Now that the Fed has not just committed itself to raising rates, but started the process, with an apparent goal of setting short term rates ultimately at 2% or higher, the yield curve - the difference between short term interest rates and long term rates - takes on more importance, particularly since long term rates are already very low.

An inverted yield curve has been a nearly flawless harbinger of recession, with its only miss in the last 50 years being the slowdown-but-not-quite-recession of 1966.  The yield curve also inverted in 1928.  A flat yield curve conveys at least a slowdown, as was the case in 1994. The yield curve was also very briefly flat in 1930.  Please note that a positively sloping yield curve in a deflationary era does not necessarily mean expansion, as there was no inversion between 1930 and 1954.

Here is the detailed graph covering the last 30 years:

Typically as the Fed has raised the Fed funds rate, longer term rates have also risen at a slower pace -- up to a point. Under current conditions, the Fed risks inverting the yield curve if long rates do not increases.  But a large increase of, say, 2% in long rates will also choke off the expansion, as things like increased mortgage costs strangle the important housing market.  So the Fed must steer a path between Scylla and Charybdis.  The above graph will show how they are doing.

Weekly Review of US Bond, US Equity and International Economic Numers

These are over at XE.com

US Equity

US Bond

International 

Weekly Indicators for December 28 - January 1 at XE.com

 - by New Deal democrat

My Weekly Indicators piece for the final week of 2015 is up at XE.com .

Too soon to ttell, but we may be getting near an important turning point.