The Fed scrapes Scylla after careening into Charybdis

 - by New Deal democrat

In the past several years, I have described the Fed as trying to steer in between the Scylla of a yield curve inversion and the Charybdis of higher rates wounding the housing market.

Recently several trends have reversed. This offers some relief to housing, but more risks to the economy as a whole. This post is Up at Seeking Alpha.

By the way, several times yesterday and today, the yield curve inversion has spread to the one year vs. five year yield.

The Transportation Slowdown

 - by New Deal democrat

Well over 100 years ago, Charles Dow (he of the Dow Jones Industrial Average) posited a theory that industrial and transportation stock prices should move in tandem. Why? Because everything that factories produced had to be transported to market for delivery.

So it is of interest that FedEx said yesterday that its business has been slowing down. And an important trucking transportation metric softened in November, as reported last week.

But readers of my "Weekly Indicators" columns got a heads up over two months ago.

I explain why in a post over at Seeking Alpha.

November housing permits boosted by multifamily dwellings

 - by New Deal democrat

November was a *relatively* good month for housing permits, as in, improved *relative* to most of this year, although not at the heights of last winter.

Most importantly, the least volatile number, single family permits, was flat compared with last month, and down -2% from a year ago:

There's no change of trend here.

Total permits did increase decently, and are up (less than 1%) YoY, although below their previous highs of January, March, and April:

The improvement came in multi-unit dwellings, which had a nice pop this month:

These are somewhat of an "alternative good" to single family homes, so the improvement may well reflect the stress of higher sales and mortgage costs.

Starts, which tend to lag permits by a month or so, still reflect the poor readings of the last few months there:

Probably some of the improvement in permits in November was due to mortgage rates, which declined a little at both the beginning and end of November:

Note, however, that mortgage rates are still above where they were when we had the housing peak last winter, and prices are higher as well. So, while I expect continued improvement in December, I don't think there's enough of a boost to push housing to significant new highs.

The US economy did not boom in 2018

 - by New Deal democrat

At the beginning of each year, I try to identify economic series that I think will be most important in the next 12 months.  This year I asked: Is the US economy going to enter a Boom in 2018?

There is no standard definition of a Boom. But in my lifetime there have been two occasions when the "good times" feeling was palpable, and the economy was working extremely well on a very broad basis: the 1960s and the late 1990s tech era. During both times,  employment was rampant and average people felt that their situations were going well.

Back in January I identified five markers that, taken together, marked off the two eras as unique: 

•  the low unemployment rate 
•  the duration of a very good rate of growth of industrial production
•  strong growth in real average hourly wages
•  strong growth in real aggregate hourly wages, and 
•  increasing inflation.

Now that the year is ending, let's update all of these.

1. Unemployment remains very low

In both the 1960s and late 1990s, the unemployment rate (note that the U6 underemployment rate wasn't reported in its current configuration until 1994, and so is not helpful), hit 4.5% or below for extended periods of time:

While these weren't the only two periods of low unemployment, they are among those that stand out.

We had already hit that marker at the beginning of the year, and through the course of the year, it has only improved:

The unemployment rate is now the lowest in 48 years, since 1970.

2. Industrial production did briefly boom, but has backed off.

During both the 1960s and 1990s, production grew at or over 4% a year for extended periods of time, not just right after the end of a recession.  At the beginning of this year, production was under 4%:  

It did surge above 4% during the three months of the third quarter, but for the last two months YoY growth in industrial production is back below 4%:

3.  Real average hourly wages failed to ignite

In contrast to other expansions, during the 1960s and the late 1990s, real average hourly earnings also grew at roughly 1% YoY or better, and even exceeded 2.5% growth for significant periods:

During the current expansion, by contrast, real wages have only grown by more than 1% when gas prices have declined dramatically. In 2018, the situation continued: real average hourly wages grew by no more than 0.3% YoY until the last three months, when a big decline in gas prices caused consumer inflation to subside, leading to a YoY rate of growth of exactly 1% in November:

4. Real aggregate payrolls continue to grow modestly

 During the 1960s and 1990s booms (as well as some other expansions), real aggregate earnings grew at a rate of 4% YoY or better, for extended periods of time:

By contrast, during this expansion, and continuing this year, real aggregate payrolls have averaged growth of about 2.5% a year:

This is decent, but it's simply not a boom.

5. Inflation has waned

The fifth and final  marker of a Boom -- probably as the byproduct of the first four -- is an increase in the YoY rate of inflation:

A boom means that resources are getting constrained, so bidding for them intensifies.

The rate of consumer inflation did increase throughout the first half of this year, but since July has waned, and with one month's data left to go, is only 0.1% higher (2.2% vs. 2.1%) than the rate of inflation at the beginning of the year:

To sum up, the production side of US economy, which was doing well at the beginning of 2018, did briefly boom during the summer, but the consumer side never joined it. Only one of the five markers of a boom -- low unemployment -- persisted through the year. The US economy did not boom in 2018, and if anything is likely to decelerate sharply in 2019.

Weekly Indicators for December 10 -14 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

A decline in mortgage rates unsurprisingly appears to have caused a rush in applications to lock in those rates. Plus one more anomaly ....

Real retail sales very positive; industrial production decent

 - by New Deal democrat

Real retail sales for November, together with the revisions for October, were very positive.

While November sales, both nominally and adjusted for inflation, increased +0.2%, October sales were revised upward to a nominal +1.1%. On an inflation adjusted basis, that translates to +0.8%.

As a result, as of November both real retail sales and real retail sales per capita set new records:

The latter has turned negative more than one year before both of the last two recessions, and so supports the case for no recession in 2019.  The former, on a YoY% basis, tends to be a decent if noisy short leading indicator for employment. Here what YoY growth in real retail sales looks like:

About the least positive thing you can say about this morning's report is that, even with the upward revision to October, real retail sales appear to have downshifted from their earlier strength, as the strong +1.7% real gain from September 2017 drops out of the comparison. This suggests continued positive employment reports in the next few months, but maybe not at the 200,000+ levels of a few months ago.

Meanwhile, November industrial production increased +0.6%, but October was revised downward by -0.3%, so the net result was a +0.3% gain. On a YoY basis, industrial production has also decelerated from a "boom" readings to decently positive ones:

Together, these two reports this morning say that the nowcast remains very good.

A note on initial jobless claims

 - by New Deal democrat

Initial jobless claims for last week were reported at 206,000 this morning. That is one of the lowest weekly readings during this expansion.

More significantly, the 4 week moving average is back below 10% off its low, within the range of typical noise:

And it is down -4.6% YoY, which as the below graph going back 50 years shows, is actually a quite positive reading:

I continue to expect a slowdown next year, so I am not expecting any substantial improvement in this number, but it is certainly not negative now.

Real wage growth: November 2018 update

 - by New Deal democrat

Now that November inflation has been reported (as unchanged), let's update what that means for real wages.

Nominally, wages for nonsupervisory workers grew +0.3% in November. With inflation flat, that means real wages also grew +0.3%: 

Even so, although they are at a new 40 year high, real hourly wages are nevertheless below their peak level set in the early1970s!

On a YoY basis, real wages have risen 1%:

Since 1999, the change in real wages has almost explusively been determined by the price of gas.

Finally, real aggregate wages have now risen 26.8% from their bottom in October 2009:

The total advance during this expansion is only exceeded by the 1960s and 1990s at this point.

On the other hand, growth in real aggregate wages has averaged 2.5% in this expansion, varying from 1% to 8% depending on what has happened with gas prices:

This is a very weak rate of growth, ahead of only the 2000s expansion and on par with the 1980s expansion.

All in all, the grwoth in real wages is good news. It's just nearly good enough compared with the growth in business profits generated by the expansion.

The October JOLTS report: very good employment market continues, just below best levels

- by New Deal democrat

Monday's JOLTS report for October was, surprisingly, a little weaker than the employment report from one month ago, that I described at the time as perhaps the best in the entire expansion. But this is a relative statement; basically, most of the series were only a little off their recent best readings:

• Quits were just below their all-time high in August, and July as well.
• Hires were just below their August best.
• Total separations made another new expansion high
• Layoffs and discharges declined a little from August and September levels (a positive), although they are slightly elevated compared to last spring.
• Job openings were also just below their all time high in August, as well as September.

Let's update where the report might tell us we are in the cycle, remaining mindful of the fact that we only have 18 years of data. Below is a graph, averaged quarterly through the third quarter, of the *rates* of hiring, quits, layoffs, and openings as a percentage of the labor force since the inception of the series (layoffs and discharges are inverted at the 3% level, so that higher readings show fewer layoffs than normal, and lower readings show more):

During the 2000s expansion:

• Hires peaked first, from December 2004 through September 2005
• Quits peaked next, in September 2005
• Layoffs and Discharges peaked next, from October 2005 through September 2006
• Openings peaked last, in Spril 2007

By contrast during and after the last recession:

• Layoffs and Discharges troughed first, from January through April 2009
• Hiring troughed next, in March and June 2009
• Openings troughed next, in August 2009
• Quits troughed last, in August 2009 and again in February 2010

Now here's what the four metrics look like on a monthly basis for the last five years: 

Through August, job openings, quits, and hires have all surged higher this year, with openings virtually "on fire." In the last two months of data there's been a pause, but nothing that suggests a downtrend.

.

Next, here's an update to the simple metric of "hiring leads firing," (actually, "total separations"). Here's the long term relationship since 2000 through Q3 of this year: 

Here is the monthly update for the past two years measured YoY:

In the 2000s business cycle, hiring and then firing both turned down well in advance of the recession. Both are still advancing. The recent relative surge in separations might just be noise.  

Finally, let's compare job openings with actual hires and quits. As you probably recall, I am not a fan of job openings as "hard data." They can reflect trolling for resumes, and presumably reflect a desire to hire at the wage the employer prefers. In the below graph, the *rate* of each activity is normed to 100 at its August 2018 value, since that has been the recent peak:

When I first presented this graph, I noted that while the rate of job openings is at an all time high, the rate of actual hires has only just reached its normal rate during the several best years of the 2000s expansion, and is below its rate at the end of the 1990s expansion. 

This year both hires and quits have accelerated, with hiring decisively above its level from the last expansion -- although, as you can see in the first graph above, the *rate* of hiring remains below that of the 2000s expansion. My take has been that employees have reacted to the employer taboo against raising wages by quitting at high rates to seek better jobs elsewhere. If the dam is finally breaking, we should see the hiring rate increase, and quit rate level off.

In summary, the October JOLTS report continues to show a very good employment market, just below its best levels. My expectation remains that this will start to cool down early next year as a slowdown begins to take hold.

Scenes from the November Jobs Report

 - by New Deal democrat

Here are a few noteworthy highlights from Friday's employment report.

1. Temporary help continues positive.

As I wrote a week ago, temporary employment (blue in the graphs below) leads overall employment (red). So it is good news that it continued to grow in November:

Somewhat more ambiguously, the rate of growth has waned a little in the past few months. But is isn't really on a downward trajectory at this point:

Just based on this metric (there are of course lots of others that can be used), employment growth in the general range of 160,000 to 190,000 a month, at least on a 3 month average, looks likely in the immediate future.

2. Wage growth continues to accelerate.

This is the second month in a row that nominal average hourly wages grew at better than a 3% YoY rate for nonsupervisory workers (blue in the graph below). In real terms, YoY wage growth also looks set to continue to increase (red). This is because of the decline in oil prices:

Note that we won't get the inflation report for November until Wednesday. Note also that almost all of the good news in real wage growth in the last 15 years has been due to temporary declines in the price of gas. Finally, note that we still haven't approached the 4% nominal YoY growth we got in the previous economic expansion.

3. Signs of fraying around the edges #1: Not in Labor Force, but Want a Job Now.

This is the number of people who haven't looked for a job at all recently, but say they would like a job. This has trended upward in the last 8 months:

Not a red flag at this point, but probably a yellow one, as in, "pay increased attention."

4. Signs of fraying around the edges #2: part time for economic reasons.

While the U3 unemployment rate held steady last month, the U6 underemployment rate rose by 0.2%. This is primarily due to an increase in the number of people who are involuntarily employed part time:

It is not well known that while the unemployment and underemployment rates are lagging indicators coming out of a recession, they are leading indicators going in. Since they tend to follow the initial jobless claim numbers with a one or two month lag, and those have risen by over 10% since September, it's not a surprise that at least the U6 number rose.

Again, this isn't a red flag, and initial jobless claims will give us a signal first. But it does serve to confirm the recent weakness in initial jobless claims, and confirm that we should "pay increased attention."

Weekly Indicators for December 3 - 7 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The long leading forecast has now been negative for four weeks in a row. Please remember that clicking and reading, besides being educational, helps reward me for the work I put into this.

November jobs report: another good report with some signs of deceleration

 - by New Deal democrat

HEADLINES:

• +155,000 jobs added
• U3 unemployment rate unchanged at 3.7% 
• U6 underemployment rate rose 0.2% from 7.4% to 7.6% 

Here are the headlines on wages and the broader measures of underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  rose +88,000 from 5.309 million to 5.397 million   
• Part time for economic reasons: rose +181,000 from 4.621 million to 4.802 million 
• Employment/population ratio ages 25-54: unchanged at 79.7% 
• Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.07 from  $22.89 to $22.95, up +3.1% 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.) 

Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  

• Manufacturing jobs rose +27,000 for an average of +20.000/month in the past year vs. the last seven years of Obama's presidency in which an average of +10,300 manufacturing jobs were added each month.   
• Coal mining jobs rose +400 for an average of +75/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

September was revised downward by -13,000. October was revised upward by +1,000, for a net change of -12,000.

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.

• the average manufacturing workweek was unchanged at 40.8 hours. This is one of the 10 components of the LEI.
• construction jobs rose by +6300. YoY construction jobs are up +71,400.  

• temporary jobs rose by +8300. This is positive, but marks continued deceleration from its 12 month average of +15,000.
• the number of people unemployed for 5 weeks or less rose by +69,000 from 2,057,000 to 2,126,000.  The post-recession low was set six months ago at 2,034,000.

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

• Overtime was unchanged at 3.5 hours.
• Professional and business employment (generally higher-paying jobs) increased by +32,000 and  is up +563,000 YoY.
• the index of aggregate hours worked for non-managerial workers rose by +0.1%.

•  the index of aggregate payrolls for non-managerial workers rose by +0.7%.     

Other news included:            

• the  alternate jobs number contained  in the more volatile household survey increased by +233,000  jobs.  This represents an increase of 2,759,000 jobs YoY vs. 2,443,000 in the establishment survey.    
• Government jobs decreased by -6,000.

• the overall employment to population ratio for all ages 16 and up was unchanged at  60.6% m/m and is +0.5% YoY.          
• The labor force participation rate was unchanged at 62.9% m/m and is up +0.2% YoY.

SUMMARY

This was another good report. The worst that can be said is that it is a deceleration from last month's excellent report, which I described as overall the best of this entire expansion. Perhaps the most positive aspect of this report was the nice pop in aggregate payrolls, up 0.7%, and that nominal wages for average workers coninued to increase more than 3% YoY.

There was a little fraying around the edges, as involuntary part time employment, the U-6 underemployment rate, and the number of those who aren't even looking but would like a job now all increased. Temporary employment, a particularly good leading indicator for overall employment, shows continued signs of deceleration (growth, but at a slower pace).

Bottom line: clear sailing in the present and in the near future, with some grayish clouds perhaps on the horizon.

Consumer spending looks like classic later cycle pattern

 - by New Deal democrat

There were a couple of reports earlier in the week that shed some light on several important sectors.

First, October residential construction spending was reported. This series lags the housing sales data, but has the advantage of being smoother than any other series, including single family permits. Here they are for the last 20 years:

As you can see, residential construction peaked at the beginning of this year and has begun a downward trajectory. It is currently off about -5%, which is about the same % it declined in 1999 (a *very* slight decline) before the 2001 recession - a business and employment recession that consumers pretty much sailed right through. I'm not anticipating this turning back up until permits do.

Second, November motor vehicle sales were reported, at 17.4 units, down -0.5% from one month before, but well within the range of this metric since the beginning of 2015 (Note: graph below only goes through October):

As you can see, it is very typical for vehicle sales to plateau like this until less than a year before a recession begins.

Since housing and cars are the two biggest consumer durable purchases, this signals that neither leading sector is growing, very typical for late cycle behavior.

In fact, the change in consumer purchasing behavior between the earlier vs. later part of expansions is so well-established that variations on it are two of my mid-cycle indicators. I went back and took a look at where we stand and, well, the results are interesting. That will be the subject of a follow-up post.

A note about the financial markets

 - by New Deal democrat

The markets are closed today in observation of former President George H.W. Bush's funeral. In the meantime, let me offer a brief few observations (pontifications?) about my sense of the immediate and longer term trend.

First off, here is a broad look at the last 10 years for the S&P 500 (blue, right scale) and 10 year Treasury bond (red, left scale):

The moves in the bond market look exaggerated, because the values are between 1.4% at its lowest, and 4% at its highest. Basically in the last 10 years yields on the 10 year bond completed their slow decline from about 20% in 1980, then went sideways 2011 and 2017, and this year started what I suspect will be an equally long term climb (although whether they will peak in a few decades at 6% or 600%, I have no clue).

Meanwhile the stock market quadrupled in value (!), although with a few hiccups along the way, particularly in 2010, 2011, 2015-16, and this year. 

In other words, in the past 10 years bonds paid you very little, while stocks rewarded you handsomely.

Next, let me take a look at a few of those hiccups. First, here is the 2010-11 period:

Note that on several occasions (roughly mid-2010 and mid-2011) stocks declined by roughly 10%, and bond yields declined in tandem.

The same pattern appears in October 2014 and January 2016:

This is called a "flight to safety." Stock investors get spooked for some reason or other, and run into the relative safety of bonds. Stock prices fall, and bond prices rise, which means bond yields fall.

That's what I think is happening at the moment. After a 40% run-up beginning immediately after  the 2016 US Presidential election (20% of which was in December 2017 and January 2018 alone):

this year stocks have gone sideways in roughly a 15% range:

In the broad view, investors got too exuberant in 2017 mainly, I suspect, in anticipation of the tax cut goodies, and once the goodies took effect, realized that all of their value - and then some - was already priced in. In the close-up view, the past month looks like another "flight to safety."  

NOTE: Complete speculation alert!: Because these things tend to inflict surprise on as many people as possible, my *guess* is that the carnage will continue until roughly the moment that 2 to 10 year bond yields invert. Then, once people are sure that the end is nigh, both will reverse higher, at least temporarily ending the inversion.

Finally, what is also interesting about this year is that it appears to mark a "change of season" in the relationship between stock and bond performance. From 1981 through 1998, stock prices and bond yields generally moved in the opposite directions (stocks up, yields down). Then, from 1998 until this past January, bond yields and stock prices tended to move in the same direction -- not on a daily basis, but in the longer view. This year, as the first and third graphs above show, stock prices and bond yields have again generally become mirror images of one another.

This year's pattern (with rising bond yields) last happened in the 1950s, which was a period of "reflation," i.e., bond yields and the YoY change in prices gradually increased. That's another reason why I think we have started a new secular financial era.

End of observations/pontifications.

Strong manufacturers new orders in November ISM report

 - by New Deal democrat

There are a lot of economic writers who won't tell you when something moves against their thesis. Those guys trumpeting a flatlining of commercial and industrial growth last year? They never heard of it this year (hint: because it's up!).

To the contrary, one of the reasons I do my Weekly Indicators piece is that it forces me to mark my forecasts to market each week. If a forecast doesn't work out, I want to undertake a post mortem and understand why.

I certainly don't have to do that today, but yesterday one piece of evidence did move against my thesis of a slowdown next year: ISM new orders for November.

As I reiterated in today's piece at Seeking Alpha on yesterday's yield curve inversion, the long leading indicators have pretty much been deteriorating all year long, to the point where for the last three weeks they have been negative. So there is simply a lot of evidence to suspect that the economy is going to follow suit after a year or so.

In the meantime, I've started to focus on whether the short leading indicators are also beginning to show signs of weakness. One such measure is manufacturers' new orders. On a semi-weekly basis, I track that via the regional Fed indexes. On a monthly basis, the ISM new orders index is the go-to metric.

Well, one month ago the ISM new orders subindex declined to nearly a 2 year low. Then, during November, the average of the five Fed regional indexes declined further. So far, looking pretty good for my hypothesis.

Then, at the last minute, the Chicago PMI Index completely blew out to the upside, including a very strong new orders index. And yesterday, the ISM report's new orders subindex for November rose back strongly. Here's the graph, from Briefing.com:

Yesterday's reading was about average from earlier this year.

So, fair is fair. Yesterday's ISM report is contra my thesis. On the other hand, the general trend over the last few months has been a gradual backing off from extremely strong growth seen at the beginning of this year.

A one day bond inversion does not a recession make UPDATED

 - by New Deal democrat

UPDATE: I have a much more detailed look at this inversion, with graphs and historical context, Up at Seeking Alpha.

You are going to read a lot about a yield curve inversion in the US Treasury market over the next 24 hours. (As of 5:30 PM eastern time, both the 3 year and 5 year bond yield slightly less interest than the 2 year bond.) Most of the commentary will probably boil down to "WE'RE DOOOMED!!! (in the next 12 to 24 months).

Maybe. But consider that, several times, an inversion somewhere along the yield curve has been a signal for the bond market to reverse (see, 1994 and early 1998). Further, consider that the Fed and its economists can understand this matter as well. And if this material should happen to form a segment on "Fox and Friends" tomorrow morning, a Tweetstorm threatening the job of Fed Chairman Powell might ensue.

Most importantly, consider that the Fed is an actor. The Fed has agency. The Fed can react to this news and affect its future course, maybe by deciding to pause its assumed rate hike later this month.

In short, a one day bond market inversion does not a recession make

Why this Friday I'll pay particular attention to the temporary jobs number

 - by New Deal democrat

With the long leading indicators outside of corporate profits and ease of credit having turned neutral to negative, at least for now, my attention is turning more and more to the short leading indicators. And one of those -- temporary employment -- is of particular importance to the overall employment situation. It is reported as part of the overall monthly jobs report, and I will be paying particular attention to it when the November jobs report is issued this Friday.

Since the BLS started to report the series in 1991, temporary employment has tended to peak roughly 6 to 9 months before overall employment, and to bottom roughly 3 months in advance:

Here is the same information graphed as the YoY% change (note I've divided temp growth by 4 for purposes of scale):

and here is a close-up since 2012. The lead and lag times have certainly been variable, but they are nevertheless clear:

The simple takeaway from the above is that temporary employment is still growing, which is positive for the jobs market in the coming months. BUT, while it hasn't turned negative, that growth began to decelerate one year ago, and has slowed substantially in the last six months, causing YoY growth to be cut in half.

As a result, I am expecting the slowdown in growth to begin showing up in the overall employment numbers. Here's what the monthly numbers look like since a little over a year ago:

Over the three months beginning last November, monthly jobs growth averaged a little under 190,000. While the monthly numbers a way too volatile, a slowdown to under 175,000 job gains per month in the next few months looks reasonable.

For completeness' sake, I've also frequently noted that real retail sales, while very noisy m/m, has a good track record of leading employment by several months. Here's the YoY% look at that since 2010:

This has also moderated as September 2017's +1.7% monthly gain has disappeared from the YoY comparisons. It's too soon to know for sure if real retail sales are confirming the recent slowdown in temp hiring.

In any event, on Friday I'm going to pay particular attention to the temp hiring number, and if that slowdown continues, I'll start highlighting it in my monthly post on the jobs report.