Is the Monthly Economic Number Really Bullshit?

On Friday, I wrote the following about the monthly BLS data release:

OK -- I disagree with the birth/death model argument, but that's beside the point.  The monthly NFP data point -- and all of the hoopla that surrounds it in various forms -- is pure bullshit.

First, this was a bit of an over-reaction on my part.  What I meant to say was the hoopla associated with this statistics release is bullshit.  Every month, starting on about Wednesday, everything stops in anticipation of the report.  The excitement and tension builds with the financial world literally stopping by Friday morning.  Then, a ton of people (primarily political flunkies) who have no business analyzing the report do so, issuing proclamations from on high.  By Monday we all settle down forgetting the madness that is the monthly NFP release until the next round in 30 days. 

Just as importantly is the NFP report is subject to several revisions, meaning the number that has the most impact -- the headline number in the initial release -- could be revised to the point of being non-recognizable to the people who first heard it.  Now -- all economic numbers have this problem.   But very few economic numbers inspire the level of focus as the monthly NFP data.

Let's stipulate the following point: the jobs market is one of the most important economic indicators out there, if not the most important.  An economy that is primarily based on consumer spending cannot move forward without a healthly jobs market.  But, as the Atlanta Fed has correctly pointed out, the jobs market is composed of several different, measurable components.

• Employer behavior: not what they're saying, but what they're doing relative to the jobs market.  Are they advertising open positions?  Are they actually hiring once those positions have been advertised?
• Confidence: do businesses have enough confidence in the future to increase their hiring plans?  Are people confident enough in the jobs market to quit a job (with the most likely reason being that jobs are easy to get)?  More broadly, what opinion of the jobs market is held by both business and potential employees?  
• Utilization: of all the people in the work force,is the economy effectively and efficiently using their talents?  Are people "just getting by" or are they really contributing to the overall development of the economy?
• Leading indicators: where are we in the business cycle?  What is the likely direction of the jobs market in the next 3, 6, and 9 months? 

The point is there are a myriad number of components to a well-functioning jobs market.  A healthy market inspires confidence so that employers are willing to increase their hiring plans.  A longer period of confidence (multiple years, ideally) would lead to more efficient utilization of the labor force.  These developments could by objectively observed in employer behavior and the leading indicators.

The point of this is the monthly NFP ritual completely masks the complexity of the jobs market.  And that's something I'm finding more and more aggravating.  

South American ETFs Are Selling Off

Consider the following weekly price charts:

The Chilean ETF has an uptrend connecting the mid-2012 and end of 2012 lows.  Prices broke that trend a few weeks ago and are now below the 200 week EMA.  Additionally, they are sitting at price support established in mid-2012.  Momentum and volume readings confirm the break-down.

The Mexican ETF actually broke trend earlier this year, but consolidated sideways between the 70 and 76 price level.  Prices have bee moving lower for the last few weeks, breaking price support established earlier this year.  Momentum is dropping and volume is flowing out of the market.

The Columbian ETF broke its uptrend earlier this year.   Over the last few weeks we've seen some volume spikes as the selling has accelerated.  Momentum is dropping and money is flowing out of the market.

Peru's ETF had a solid uptrend that lasted over a year and a half.  But prices moved lower about 6-7 weeks ago, printing strong bars lower.  Also note that momentum is declining and the CMF is negative.

Brazil has been trading at low levels for the last year because of a slowing economy.  However, prices have dropping sharply over the last few weeks, bringing momentum down and leading to a slightly negative CMF reading.

The Japanese Sell-Off In Perspective

Since Abe's election in November, the Japanese ETF has rallied strongly, rising from a low of 8.75 to ~12.50, for a net gain of about 43%.  Prices dropped through support at the beginning of June on very strong volume, indicating that traders were concerned about the strength of the rally relative to the underlying economic fundamentals (essentially asking have we risen too far too fast).  Prices fell to the 200 day EMAn which is also near the 50% Fib level.

The weekly charts shows that prices have found support around the 61.8% Fib level for the mid-2012/mid-2013 price levels.

My guess is we'll continue to see a thinning out of the rally trade as people take more of a wait and see attitude about Abe's policies.  However, news like this certainly won't hurt:

Japan has revised up its first-quarter economic growth to 1 per cent, giving Prime Minister Shinzo Abe a boost as he seeks to strengthen his grip on power in next month’s upper house elections.
Government data released on Monday showed that the economy expanded at an annualised rate of 4.1 per cent between January and March, lifted by strong household spending and a pick-up in private residential investment. That was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.

How Bad Is John Hinderaker's Economic Analysis? This Bad

John Hinderaker of the Powerline blog really wants to be taken seriously as an economic analyst.

He should really stop trying.  No, really.  He's that inept.

Case in point is his latest analytical failure, "How Bad Is Obama's Economic Record on the Economy?  This Bad."  He uses the NY Times articles,  "Many Rival Nations Surge Past the U.S. in Adding New Jobs." as the basis for his analysis.

The following should be noted at the start: international economic growth comparisons are extremely tricky and usually not a good idea.  The reason is simple: each country is unique, making a comparison an "apples to oranges" situation.  For example, comparing the US to practically any other economy runs into a problem of comparing the world's largest economy by far (the US is over twice the size of the next largest single country) to a much smaller economy.  And what if the country in question is part of the south-south trade, benefiting from the commodity boom of the last 10-15 years (Canada) while the other is not?  Or one country has a lower unit labor costs (Mexico) than then other?  You get the point.

Also note that we're dealing with employment which is probably the most complicated economic indicator out there.  As I've recently noted, Macroblog -- the blog of the Atlanta Fed -- has a much better read on this set of statistics with its spider chart.  But this level of nuance is beyond Hinderaker's capabilities.

While noting that US employment growth has lagged other countries, the Times article does a very good job of explaining why:

A big part of the problem, economists say, is just how big a hole the American economy fell into in the first place. Not only did the global economic downturn begin here, it also enveloped the housing market and the banking system, sectors that were largely spared in many other countries. 

“Canada didn’t really have much of a housing bust,” Mr. Katz said.

.....

Although the construction field gained 69,000 jobs in the first five months of 2013, with 5.8 million jobs in May, that was still nearly two million fewer jobs than in 2007, according to the Labor Department.  

Remember that at the height of the Great Recession, the US was losing jobs at a 600,000/month clip.  Here's a chart of the total establishment data to highlight the issue:

The US lost over 8 million establishment jobs from 2008-2010.  And remember that on the other side of the job losses is a balance sheet recession which takes far longer to recover from.

To highlight the Times' point, here's a chart of construction and manufacturing jobs:

Construction job losses (red) are scaled on the left and manufacturing job losses (blue) are scaled on the right. Construction lost over 4 million jobs -- accounting for nearly half of the losses while manufacturing (the blue line) lost over two million jobs.  Both areas are subject to slow growth in the current environment for two unrelated reasons: housing is only now just starting to make its economic comeback and manufacturing is now far more automated meaning the labor need isn't nearly as high.  That means blue collar employees need to change jobs or in some cases careers to obtain employment.  But regardless it also means that the pace of jobs growth for both of these sectors that saw massive job-cuts will be very slow.

And we should also highlight the drop in government employment that's occurred during this time:

Total government employment has dropping between 600,000-700,000 over the same period.  And remember that most of these loses are occurring at the local level as such non-essential people as teachers, police officers and firefighters are laid off. 

Hinderaker offers this analysis of the above issues: "The Times offers several possible explanations for our poor performance, while avoiding the most obvious one: we have an utterly inept government, which, on top of its incompetence, places little value on economic growth."

Actually, no.  The Times explains the problem by providing economic nuance which isn't Hinderaker's strong suit.  They also use data.  

But that's beside the point.  The real coup de grâce of Hinderaker's piece is his international comparison of the US to Mexico and Canada.  And why is that?  Because they are fundamentally different economies than the US.  First, Canada is a raw material exporter.  That means that over the last 10-15 years the global commodity boom (with raw materials exporters selling anything that wasn't tied down to China) has been very good to Canada.  As Wikipedia notes, "Canada is unusual among developed countries in the importance of the primary sector, with the logging and oil industries being two of Canada's most important."  It's also why Canadian negotiators ate US negotiator's lunch during NAFTA negotiations. 

And then there is the fact that Canada completely avoided the financial meltdown that occurred in the US.   I'll let Barry explain that one:

I was reminded of this while reading a Real Time Economics post on Why Canada Can Avoid Banking Crises and U.S. Can’t. It discusses a new paper (and forthcoming book) by Charles Calomaris and Stephen Haber. The thesis is that Canada has a French legal history, which created a “highly-centralized federal government which controlled economic policy making and had built-in buffers for banker interests against populist forces” as the primary reason for its stability in banking.

.....

Back to Canada: The legal backdrop is a fascinating concept, one I want to explore further. But I cannot help but wonder if this line of thinking came about to avoid the obvious issues in the US, namely, the crisis was driven in large part by the radical deregulation. 

In Canada for example, there are other factors beyond the French legal history worthy of discussion. Note that in Canada, bankers cannot lobby regulators. Unlike the US, their Supreme Court does not think corporations are people. In Canada, money is not speech. There are explicit limitations on Corporate political donations. And where as we have a revolving door between government service and the private sector, the restrictions are much greater in Canada. All of this adds up to a much more intensely regulated banking system than in the America.

Remember that this crisis -- just like the Great Depression -- started as the result of a US financial crisis.  This is a primary reason the US is in the middle of a sub-par recovery.  For further information read the chapter on the Great Depression from Milton Friedman's Monetary History of the United States.

And as I've noted before, I'm bearish on Canada for a number of fundamental reasons: (see here, here and here).  In fact, it appears they're about to enter their period where balance sheet issues will constrain growth.

And the final issue with Canada is that on a year over year basis, the US has consistently outperformed the Canadian economy in constant terms since NAFTA went into effect, as this graph from the St. Louis Fed shows.  This is in complete contrast to Hideraker's assertion.

And the comparison to Mexico is just plain stupid.  Why?  Because they're a second world nation with cheap labor relative to the US.  Not only does their inclusion in NAFTA mean that any non-NAFTA country is going to locate their manufacturing facilities there, but it also means it's cheaper for US companies to locate their manufacturing facilities just across the Mexican border, assemble goods south of the border and then ship products to the US.  Here's a chart comparing US and Mexican growth on a year over year basis since implementation of NAFTA on January 1, 1994:

The bars in blue are Mexican Y/O/Y GDP growth and show that for most of the last 20 years Mexico has outgrown the US.   And Mexico's economy appears to be hitting some problems (see here). 

And then there is this Hinderaker gem:  We have consistently fallen behind better-run countries like Germany and Australia.  Does he even know that

• Both countries have universally available health care,
• Germany encourages and welcomes unions  
• Australia is a raw materials exporter who benefited from Chinese growth and is currently having problems as China slows
• Germany encourages green energy savings
• The German government actively discouraged companies from laying people off, thereby interfering in the free market

The countries that he says are all better run are far more left leaning then he actually.

And finally so long as we're comparing presidential records, let's compare non-farm job growth of Bush II with Obama.  Remember that according to Hinderaker Bush II was a genius of immense proportions (he has since scrubbed this from his blog probably due to embarassment, but nothing dies on the internet):

"It must be very strange to be President Bush. A man of extraordinary vision and brilliance approaching to genius, he can't get anyone to notice. He is like a great painter or musician who is ahead of his time, and who unveils one masterpiece after another to a reception that, when not bored, is hostile."

Bush was sworn in on January 20, 2001.  In February of 2001 there were 132,617,000 non-farm jobs in the US.  His last month of office was in January 2009 when there were 133,631,000 non farm jobs for a net gain of 1,014,000 jobs. 

Obama was sworn in in January of 2009.  In February of 2009 there were 132,936,000 non-farm jobs in the US.  In the last reading of employment (May 2013) there were 135,637,000 non-farm jobs in the US, for a net gain of 2,701,000 non-farm jobs.

For every job Bush II (the man of extraordinary vision and brilliance) created, Obama has created 2.66.  

Mr. Hinderaker, if Obama's performance is bad, what is Bush's?


 

Market/Economic Analysis: US

As usual, let's start with last week's data:

The good

The best piece of news last week was the employment report which showed an increase of 175,000 last month.  NDD correctly called it a mixed report that isn't good enough.

Auto sales gave us another piece of solid data, with a 2.7% increase m/m and 10% increase Y/Y.  For the graphs, see Calculated Risk.  Strong durable goods sales figures tell us the consumer has a certain level of confidence in the economic future.

The service sector of the economy picked-up: The NMI™ registered 53.7 percent in May, 0.6 percentage point higher than the 53.1 percent registered in April. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 1.5 percentage points higher than the 55 percent reported in April, reflecting growth for the 46th consecutive month. 

Construction spending also increased: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during April 2013 was estimated at a seasonally adjusted annual rate of $860.8 billion, 0.4 percent (±1.6%)* above the revised March estimate of $857.7 billion. The April figure is 4.3 percent (±2.0%) above the April 2012 estimate of $825.1 billion. Note that residential construction increased at an 18% Y/O/Y clip, and total private construction is up 9% Y/O/Y. 

The trade balance registered -$40.4 billion  in the latest report.  Of particular interest here is the graph of US exports:

The last 12-14 readings have this number printing right around the $130 billion level.  This shows how the EU and Chinese slowdown are hitting US exporters and partially explains the weaker manufacturing numbers we're been seeing.

The bad 

The  manufacturing ISM number printed at 49.  This is actually in line with some of the weakness we've see in the regional manufacturing surveys over the last few months (see the latest Philly Fed index and Richmond Fed survey).  The internals of the report showed the slowdown was caused by slowing international markets and contracting government spending in the US.

Conclusion

We're still in a moderate expansion, as explained by the Fed in the latest Beige Book:

Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth. The manufacturing sector expanded in most Districts since the previous Beige Book. Most Districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales. Tourism showed signs of strength in several Districts. A wide variety of business services expanded, and transportation traffic increased for producer, consumer, and trade goods. Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Commercial real estate and construction activity grew at a modest to moderate pace in most Districts. Overall bank lending increased since the previous report. Credit quality and deposits increased, while credit standards were largely unchanged. Agricultural conditions remained mixed across Districts, as weather patterns varied. Overall activity in the energy sector was flat, and mining was down. 

Let's turn to the charts:

The 60 minute SPY chart shows that prices moved from 169-160 in a disciplined trend channel.  After hitting support right around the 50%  Fib level, prices moved strongly higher, breaking through the upper channel.

On the daily chart, note that prices hit support at the trend line the connects the early January and mid-April lows.

Both ETFs that track the belly of the treasure curve are still trading right at technical support.  However, a move lower looks more and more likely.  Consider the following news:

Investors have pulled a record $12.53bn out of global bond funds in the past week, beating a speedy retreat from fixed income holdings that can fall in value as interest rates rise.

Two-thirds of the total outflows came from US funds, where nervousness over the Federal Reserve’s next moves in monetary policy is at its height. EPFR’s data stretch back to 2001.

The dollar has fallen sharply over the last week, dropping a little over 3%.  Prices are now right below the 200 day EMA and resting on the 38.2% Fib level from the mid-July highs and mid-September lows.  We see a bit of a volume spike, but nothing indicating more than a standard sell-off. 

A thought for Sunday: I'm not surprised, I watch the 'Investigation Discovery' channel

- by New Deal democrat

[Regular nerdy economic blogging will resumer tomorrow]

Revelations that the NSA is vacuuming up nearly every bit of digital information passing through US telecommunications systems have been on the front pages for the last few days, with most in Congress and the Administration reassuring us that (a) it is nothing to worry our pretty little heads over, and (b) a horrible breach of security that will help the terrorists. Unless the terrorists in question are dumb as doorknobs, this isn't telling them something they don't already know.

I confess right here, one of my guilty pleasures is watching the 'Investigative Discovery' channel, which is basically 24/7 murder detective stories. If you watch, it doesn't take long to realize that modern police work invovles, almost from the very start of an investigation (1) obtaining video surveillance from all nearby cameras, and once a suspect is identified, (2) checking video surveillance of their vehicle to determine where they were at the time of the crime, and (3) checking their cell phone records to see what tower they (or their phone) was closest to. Usually this last item is limited to calls, but in a few stories it has been suggested that simply having the cell phone "on" is enough to determine what cell tower it is pinging off of.

This all makes for great detective work, but it ought to disabuse any viewer of any idea that a record of their motor vehicle travels isn't being stored on a server somewhere (how many expressways, toll booths, and traffic lights don't have cameras there days?), and every cell phone record is also being stored by a server at least by the telecommunication company transmitting the call.

If this is pretty obvious to me simply from watching a crime detection cable channel, I'm pretty confident it is known to every non-retarded terrorist and intelligence organization in the world.

So if you start from the presumption that every act you do using electronic transmission, and all of your travels along major public highways are being monitored and stored, you're almost certainly close to the truth. The only questions that remain are (a) is it legal? and (b) how comfortable are you with it?

Constitutionally a search warrant is only required if law enforcement authorities want access to your property or your body. Aside from that they can take all the fingerprints, documents, trash, and cotton swabs of DNA they want. There are some laws designed to limit that (e.g., wiretap authorizations), but that of course depends on legislation. It is simply not a Constitutional right.

The two sources of legal authority most noted for the total sweep of non-private data are the Authorization to Use Military Force after 9/11 and the Patriot Act. The former is the more sweeping, becuase it is wrapped in Congress's affirmative Article I, Section 8 authority to authorize international hostilities (normally we think of this as just "declaring War", but if you read the provision it is clear that it encompasses an entire cornucopia of selections that may be authorized or limited, such as Writs of Reprisal (a limited hostile act short of War. Reagan's retailiation against Ghaddafi for downing a civilian jetlliner over Lockerbie, Scotland,in the 1980's is a perfect example).

The September 2001 AUMF was both very limited and exceptionally broad. It was limited because it only authorizes force "against those nations, organizations, or persons he determines planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001, or harbored such organizations or persons". At this point 12 years later it is pretty clear that only two individuals ramain who fit under this heading: Mohammed al-Zawahiri, Bin Laden's Egytpian #2; and Mullah Omar, who headed Afghanistan's Taliban government that gave Bin Laden his base. Any 18 year old Jihadi now was a 6 year old little kid in September 2001, and as far as I am concerned, the AUMF can't reasonably re read to include him.

The problem with the AUMF is that Congress completely abandoned to the President the right to determine to whom the AUMF should apply, by the language "the President is authorized to use all necessary and appropriate force against those nations, organizations, or persons he determines planned, authorized, committed, or aided the terrorist attacks ". This is simply a complete abrogation of Congress's Constitutional authority, and it has been interpreeted by the Executive to include permanent hostilities against corporate style organizations worldwide with no exception for the domestic US.

To put it simply, there is no excuse for the September 2001 AUMF to remain in force except as a manhunt for two named individuals who were involved in that attack.

That leaves us with the Patriot Act, which is not clothed in any affirmative power to make War by Congress, and so does not (or at least should not) supercede other Constitutional protections.

Should the nearly total gathering of electronic information concern you? Imagine if the law enforcement authority gathering such information was your local police department, who ultimately answer (and maybe get appointed or promoted by) your local Mayor or Council. If you were involved in a dispute with your local government, say over zoning or development, how much faith would you have that your Mayor or Council wouldn't request from a friendly office records of your vehicle's movement about town, and your cell phone records, to find out who you've been meeting with and what plans you might be making.

If you wouldn't have total faith in your local political bosses, why should you have any more faith in state or national officials? I would say the chances of this power being used in order to spy on political opponents is, over time, roughly 100%. In fact, we already have an example in history of J. Edgar Hoover, who almost certainly did exactly that with the technology and abilities of the mid-20th Century, which made Congress and a succession of Presidents afraid to cross him. Whether you agree with them or not, there's pretty good evidence that domestic electronic surveillance was used against the "Occupy" movement. If you are not concerned by that, then how about if it is used against the NRA?

So we really don't need all the inner details of the NSA domestic spying programs. to "have the debate" Obama says he welcomes. How much of your private life (and I think your private life reasonably includes your personal phone calls and your everyday travels) are you willing to share with political officials and their law enforcement employees on a permanent basis? What kind of firewalls against abuse need to be erected? Personally, I think the requirement of specifically tailored search warrants reviewed by an impartial magistrate, and regularly made public, is the very least protection - in other words, a start. Between the 2001 AUMF and the Patriot Act, I do not believe it is presently factually accurate to refer to the US as a Republic. I would very much like to have that Republic back.

Weekly Indicators: moving forward in first gear edition

 - by New Deal democrat

May monthly data reported this past week was dominated by yet another tepid jobs report of +175,000 with a slight increase in the unemployment rate due to more people entering the labor force. Average hourly earnings barely increased, so real earnings probably fell slightly for the month. The ISM reported that manufacturing contracted slightly, which services expanded at slightly better rate. Auto sales increased slightly for the month, but have been flat over a 6 month period. April factory orders also increased, but have also been flat for a 6 month period. Consumer credit increased. In the rear view mirrow, in the first quarter productivity increased, and unit labor costs fell sharply but only partially reversing a huge spike in the fourth quarter due to income being shifted forward into that quarter.

Let's start this week's look at the high frequency weekly indicators by focusing on employment metrics, which have become decidedly mixed:

Employment metrics

American Staffing Association Index

• 92 down -2 w/w, down -0.5% YoY

Initial jobless claims

•   346,000 down -8,000


•   4 week average 352,500 up 5,500

Tax Withholding

• $147.5 B for the last 20 reporting days vs. $138.8 B last year, up $8.7 B or +6.3%

In the last month, the ASA has deteriorated to being negative compared with last year, and had its worst comparison yet this week. After having a great 20-day comparison last week, this week tax withholding had its worst YoY comparison in several months. Initial claims remain within their recent range of between 325,000 to 375,000.

Transport

Railroad transport from the AAR

• +4300 or +1.6% carloads YoY


• -3300 or -2.0% carloads ex-coal


• +5800 or +3.7% intermodal units


• +12,000 or +2.5% YoY total loads

Shipping transport

• Harpex up 3 to 401


• Baltic Dry Index up 3 to 812

Rail transport has had four negative weeks in the last several months, but this week was positive.  The Harpex index has flattened after improving slowly from its January 1 low of 352. The Baltic Dry Index remains above its recent low.

Consumer spending

• ICSC +1.9% w/w +4.3% YoY


• Johnson Redbook +2.9% YoY


• Gallup daily consumer spending 14 day average at $92 up $19 YoY

Gallup's YoY comparisons remain extremely positive, as they have been for the last half a year.  The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. This week both were in the upper part of those ranges.

Housing metrics

Housing prices

• YoY this week +6.9%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase made a new 6 year record.

Real estate loans, from the FRB H8 report:

• unchanged w/w


• up +0.6% YoY


• +2.2% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Mortgage applications from the Mortgage Bankers Association:

• -2% w/w purchase applications


• +14% YoY purchase applications


• -15% w/w refinance applications

Refinancing applications had their worst week in almost 6 months, due to higher interest rates, but purchase applications continue their slightly rising trend established earlier this year.

Interest rates and credit spreads

•  4.90% BAA corporate bonds up +0.12%


• 2.14% 10 year treasury bonds up +0.15%


• 2.76% credit spread between corporates and treasuries down -.03%

Interest rates for corporate bonds, although rising strongly in the last month, have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012. On the other hand, Treasuries have returned in the last three weeks to their 2% high established in late 2011, compared with their low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012, so spreads are still a positive, and are only .01% above their 12 month low.

Money supply

M1

• +0.4% w/w


• -1.2% m/m


• +13.3% YoY Real M1

M2

• +0.1% w/w


• +0.3% m/m


• +5.7% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since.  This week's YoY reading increased sharply for the second week in a row.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It has increased slightly in the last few months and has stabilized since.

Oil prices and usage

•  Oil $96.03 up $4.06 w/w


• Gas $3.65 up +$0.01 w/w


• Usage 4 week average YoY -0.8%

The price of a gallon of gas, after declining sharply in March and April, rose again in May. The 4 week average for gas usage remained negative after two positive YoY months several months ago.

Bank lending rates

• 0.24 TED spread down -.01 w/w


• 0.192 LIBOR down -0.002% w/w

The TED spread is still near the low end of its 3 year range.  LIBOR remains close to a 3 year low.

JoC ECRI Commodity prices

• down -0.02 to 124.82 w/w


• +7.37 YoY

After several weeks of more positive signs, last week we returned to the pattern of gradual deterioration that began in February. This week most indicators remain positive and there were fewer negatives.

Temp staffing is becoming a larger concern as it declined again and remains below last year's rate. Also negative this week were mortgage refinancing and treasury bonds, reflecting the bond selloff. Real estate loans, commodities, and shipping were neutral. Gas usage remains negative but may continue to reflect increased efficiency. Gas prices increased sharply but we haven't moved into a constrictive price range yet. After having their best week in months last week, this week tax withholding had its worst comparison in months. Averaged out the two weeks are lukewarm.

The biggest positive remains very strong consumer spending. Positives included house prices, YoY purchase mortgage applications, money supply, and overnight bank rates. The spread between corporate and treasury bonds contracted. Weekly jobless claims improved. Rail had a very good week. It has been decidedly mixed over the last few months.

Last week I said that for me to be sold that the data is actually rolling over, I would want to see a sustained increase in jobless claims and a sustained deterioration in consumer spending. That wasn't happening as of last week, and it certainly didn't happen this week either. The economy still seems to be moving forward - but in first gear.

Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

You know the drill by now.

See you Monday; NDD will be here over the weekend.

What Barry Said

I've been reading Barry's blog for almost 10 years (dear God, has it been that long)?  Agree or disagree I always find his points well thought out and very well presented.  Today he makes a few very important points that should be repeated:

As we have discussed so very frequently, the monthly change in net jobs is the most over-emphasized, least important highly questionable data point you will find. NFP is a minor monthly rounding error a series subject to the oscillations of both the economy and the data assembly work performed by legions of BLS economists and statistical wonks. It is subject to corrections, revisions and re-benchmarking. It is produced by a model, as so astutely observed by Professor Box, that is wrong. However, it would be foolish not to recognize that the BLS model can be to the intelligent observer who understand context, quite useful.

OK -- I disagree with the birth/death model argument, but that's beside the point.  The monthly NFP data point -- and all of the hoopla that surrounds it in various forms -- is pure bullshit.  The numbers are revised on more than one occasion -- in some cases majorly so.  As I pointed out previously, the best employment model now is from the Atlanta Fed's Macroblog that highlights the very complex nature of this element of the economy.  It notes that employment is comprised of four different sets of statistics: leading indicators, employer behavior, overall confidence and utilization.  While leading indicators are doing well, all other metrics are in weak to moderately weak readings. Employers just aren't making the hires right now despite an increase in job openings advertisements and positions.  And our utilization is terrible.   And it is those readings that explain the basic problems of the jobs market right now. 

There are two more points that should be reiterated:

1) This is a post-credit crisis recovery which is progressing via a gradual improvement in balance sheets (a “beautiful de-leveraging” to quote Dalio), sub-par GDP growth, anemic job creation.

2) Secular changes in employment — huge improvements in productivity, baby boomers retiring, globalization — have all impacted the overall employment trends, mostly with a negative bias.

The first point has been made here ad nauseum -- but it needs to be repeated because there are a host of economic "commentators" who are, well, dumber than a post.  They continue to treat this recovery like a standard, "raise interest rates to slow inflation" recovery when in fact it's not.  Given the general economic backdrop, the economy is actually doing fairly well.


Also note that changes in US demography, business practices and overall globalization are having a tremendous impact.  Case in point.  Yesterday I had a late afternoon appointment, but thanks to my trusty I-Phone I was able to move two separate deals forward via text, email an phone.  This increase in productivity is economy wide and is lowering the need for labor in a big way.  Also to be considered as no small force is the retirement of the baby-boomers which is lowering overall workplace participation.

Let me add a further point.

4.) If some "analysts" are dumber than a post, Washington is proof positive that the lobotomy industry is alive and well somewhere on the east coast.

The fact that we're in the middle of a sequester with a decreasing deficit and 7%+ unemployment is beyond stupid.  When was the last time you heard anyone in Congress or the executive branch talk about the U6 unemployment rate, or the fact that we clearly have an employment problem in the US?  Me neither.  'Nuff said.

Anyway -- thanks to Barry for providing some great analysis over the years. 

May employment: a mixed report that isn't nearly good enough

- by New Deal democrat

May's employment report can best be described as a tepidly good report, that mainly took back losses we saw in several categories last month. You probably already know the headlines, +175,000 jobs added, and the unemployment rate ticked up .1 to 7.6%. Government subtracted -3000 from the 178,000 private jobs number. The broader U6 unemployment rate ticked down -.1 to 13.8% (putting us back at March's level).

As always for me, after the headline the next thing I want to do is look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. This was generally good, but mainly in that April's bad numbers were reversed, putting us back a March levels:

• temporary jobs - a leading indicator for jobs overall - increased by 25,600.


• manufacturing jobs declined -8,000. This is the third month in a row of manufacturing job losses, and is a red flag


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose 232,000. This places it back in the caution zone nearly 300,000 off its lows.


• the average manufacturing workweek rose +0.1 hour from 40.8 hours to 40.7 hours. This is one of the 10 components of the LEI and will affect that number positively.


• construction jobs gained 7000.

Now here are some of the other important coincident indicators filling out our view of where we are now:

• the average workweek was unchanged at 34.5 hours


• overtime hours were also unchanged


• The broad U-6 unemployment rate, that includes discouraged workers, fell back from its April level of 13.9% to its March level of 13.8%.


• the index of aggregate hours worked in the economy, which last month had been reported to have fallen -0.4 from 98.2 to 97.8, was revised to a -0.1 fall, which was reversed with a +0.1 rise back to its March level of 98.3

Other news included:

• the alternate jobs number contained in the more volatile household survey showed a gain of 319,000 jobs, which with April's +293,000, totals over +600,000 in two months.


• 420,000 people entered the labor force, muting the impact of the slight increase in the unemployment rate.


• Combined revisions to the March and April reports totalled -12,000.


• average hourly earnings increased $.01 to $23.89. The YoY change rose from +1.9% to +2.0%. Since I expect May CPI to rise at least 0.2%, this will be a real albeit slight m/m decline.

This month's report can be filed under the catergory of "positive, but not nearly good enough," which basically describes the entire last 3 years. Most of the positive indicators outside of the headline number actually just take back last month's declines. The only - slight - silver lining in the ongoing losses in manufacturing jobs is that we don't rely on those any more for a functioning economy.

There's nothing to get excited about in this report, and while it is mainly positive, there are some warning signs that the metrics are stalling.

A Quick Point Before the NFP Release

The above 60 minute SPY chart shows the market to be in a disciplined sell-off.  Remember this as "market mavins" pontificate from on high.  In essence, we're in a standard pull back.

It's NFP Day!

Today the BLS announces the monthly employment numbers.

NDD will "run point" on our analysis; I'll add a few points as well.

Anyone want to wager a number?  I'll go 145,000.

EU Depression Marches Onward

The unemployment rate continues to move higher.

Manufacturing numbers continue to print in negative numbers, although the trend is lessening

• Final Eurozone Manufacturing PMI at 48.3 in May (flash: 47.8)
• Downturns ease in all nations covered
• Price deflationary pressures remain, as input costs and output prices fall further

Here's a chart of the data:

Everybody's still below 50.

Heritage Economist Called Out For, Well, Lying

H/T Krugman

About Time.

Market/Economic Analysis: India

Like it's BRICs cousin Brazil, India is facing some fairly heavy problems.  I last discussed the Indian economy in April and noted they were not looking very promising.  First, they are dealing with slower growth and higher inflation.  But structural problems are now coming to the surface.  First, their infrastructure is in terrible shape and is now biting into growth:

Of all the problems blamed for the slowdown over the past two years – recession in Europe, lack of skills in India, burdensome labour laws, port congestion, corruption and bureaucracy – the electricity shortage is now regarded by government and business alike as among the most serious.

  “We used to think roads were the most important thing,” one government minister confided this week at a reception. “But it’s power, power, power.”
 
Economists who study the Indian economy – which has probably just overtaken Japan to become the world’s third largest measured by purchasing power parity, according to the Organisation for Economic Co-operation and Development – say that one of its peculiar weaknesses is the small size of its manufacturing sector.

And the government is struggling with questions about its overall legitimacy as allegations of corruption and graft continue:

Indian Prime Minister Manmohan Singh’s latest skirmish with corruption risks setting back efforts to spur growth, worsening a legislative logjam under a government set to pass the fewest bills ever in a full term.

Singh, 80, is grappling with renewed allegations that he has allowed corruption to fester after separate graft probes led to the May 10 dismissal of the law and railways ministers. Parliament ended two days early last week as opposition parties demanding the men’s resignation blocked proceedings, with proposals to open up the country’s pension and insurance industries to overseas investment still stalled. 

.....

Over the last four years, at least six ministers have resigned after being accused in corruption cases, with the opposition parties claiming this is the most graft-ridden government in India’s history. 

Both of these factors -- along with the general global slowdown -- is leading to slower GDP growth.  From the latest GDP report:

GDP at factor cost at constant (2004-05) prices in the year 2012-13 is now estimated at Rs. 55,05, 437 crore (as against Rs. 55,03,476 crore estimated earlier on 7th February, 2013), showing a growth rate of 5.0 percent over the First Revised Estimates of GDP for the year 2011-12 of Rs. 52,43,582 crore, released on 31th January 2013.

.....

Growth rates in various sectors are as follows: ‘agriculture, forestry and fishing’ (1.4 percent), ‘mining and quarrying’ (-3.1 percent), ‘manufacturing’ (2.6 percent), ‘electricity, gas and water supply’ (2.8 percent) ‘construction’ (4.4 percent), 'trade, hotels, transport and communication' (6.2 percent), 'financing, insurance, real estate and business services' (9.1 percent), and 'community, social and personal services' (4.0 percent).

News stories have noted that the combined effect of a weakened central government, high budget deficit and overall beaurocratic inefficiency are hindering growth:

Singh’s eight-month push to boost the economy has in recent weeks floundered as protests over alleged graft in government disrupted parliament, impeding bills seeking to lure foreign capital, simplify taxes and provide more land for industry. At the same time, a record current-account deficit is constraining Indian monetary easing as the global recovery falters.

“Growth is weak and I am skeptical about a sharp bounce-back anytime soon,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “The Reserve Bank of India will be cautious about retail inflation and the high current-account deficit.”

The central bank also believes the Indian economy is in weak shape:

On the domestic front, most Members were of the view that the overall demand situation is very weak. Industrial growth is subdued - new orders are expanding only modestly and instances have been reported where even after placing orders, clients are advising manufacturers not to deliver goods. Downgrading of companies by rating agencies has gone up by 30 per cent. The services sector is also weak and productivity in services and manufacturing sectors has been adversely affected, leading to supply constraints. The supply response is low, notwithstanding sizable unutilized capacity in the economy. Profit margins have been squeezed due to minimum wages rising with consequent wage pressures in the organized sector.

For a more detailed look, see this link from the central bank.

The latest Markit manufacturing and service report do paint a picture of an economy that is growing, albeit barely in the case of manufacturing.

Firs is the manufacturing report:

Operating conditions in the Indian manufacturing economy stagnated during May. The seasonally adjusted HSBC Purchasing Managers’ Index™ (PMI™) – an indicator derived from individual diffusion indices measuring changes in output, new orders, employment, suppliers’ delivery times and stocks of purchases – fell from 51.0 in April to 50.1 and was at a 50-month low.  

Reflective of weaker gains in incoming new work and persistent power outages, output decreased in May, the first decline registered since March 2009. That said, production fell only slightly. Order book volumes rose for the fiftieth consecutive month. The rate of expansion was, however, marginal and the slowest in that sequence. Panellists suggested that demand was maintained, but commented on increased competition for new work and tough market conditions overall, particularly at home. Encouragingly, foreign orders rose at an accelerated pace during May. Growth in export business was solid and the fastest since January. Monitored companies indicated strengthening demand from key export clients. Meanwhile, unfinished business levels increased, amid evidence of power and water shortages. Backlogs of work rose solidly and at the quickest pace in five months.

And then there is the services report, which was more bullish:

The seasonally adjusted HSBC Services Business Activity Index posted 53.6 in May, up from 50.7, pointing to a solid expansion in output, one that was the fastest in three months. This contrasted with a fall registered in manufacturing output, the first decline in 50 months.  May data pointed to higher levels of new work placed at private sector firms in India. The rate of expansion was moderate and little-changed from April. Service providers stated that demand was stronger and new products were launched. Manufacturers reported weaker gains in incoming new work, tough market conditions and increased competition.

Let's turn to the charts of the Indian ETF

The ETF is still trading between the 55 and 62 lever.  Momentum is fluctuating and prices are using the 200 day EMA line as technical support.

The main issue for the market is when will it break out of its range and what direction will it move in?

Mortgage Rates Rise; Mortgage Bonds Drop

Mortgage backed bonds have dropped below key support at the 108 price level.  Other parts of the chart add to the bearish interpretation.  Prices are below the 100 day EMA with the smaller EMAs moving lower.  The 10 and 20 day EMA have moved through the 20 day EMA and momentum is negative.

The Financial Times outlines the the potential problems:

The change could affect the US economy in two ways: by making new loans less affordable, it could damp the recent recovery in house prices; and it could reduce the number of Americans refinancing into cheaper mortgages, eliminating savings that have boosted consumer spending. 

Keith Gumbinger, vice-president of mortgage research company HSH, said: “The rise in the rate is enough to slow down the refinancing market, as even a small bump up in rates can put homeowners on the fence.”
Refinancing applications had already begun to decrease, falling 12 per cent in the week to May 24 according to the Mortgage Bankers’ Association – the largest single-week drop this year and back to their lowest level since December 2012.

However, other analysis disagrees.  This is from Wonkblog, citing Goldman research:

It also shows an initial reason for some optimism. At a 30-year fixed-rate mortgage rate of about 3.8 percent, the typical American homebuyer can afford a $279,000 house. That’s 45 percent more than the current price of houses. That suggests that affordability isn’t the thing holding Americans back from buying houses (instead, it may be such factors as tight credit standards, difficulty building up a down payment  or lack of confidence in future job prospects). It also implies that slight increases in the mortgage rate shouldn’t completely undermine the improvement in the housing market; the thing to watch is not rates per se, but what happens on those other factors that are drags on would-be homeowners.

And that bodes particularly well:  As we wrote last week, the rise in rates over the past month appears to be driven primarily by improving economic prospects. If that’s the case, even as homes become a bit more expensive, they will be doing so at the same time those other restraining factors dissipate. So rising mortgage rates, if they’re rising for good reasons, could actually be net positives for the housing market if they result from more people having jobs and being confident in their prospects.

Has Gold Found a Temporary Bottom?

The top chart is a daily chart of the GLD ETF, and it shows a potential bottom forming in the 130 area.  Don't get too excited by this development as the chart is still bearish overall.  The longer EMAs (200 and 50 day) are both moving lower and prices are using the shorter EMAs as technical resistance.  And even if we saw a rebound, the most likely areas of resistance would be the Fibonacci levels from the early October high and mid-April sell-off.

I believe the key to this chart is currently in the monthly numbers, which show that prices have broken a multi-year uptrend.  Also note the 130 price level is is important from a Fibonacci perspective.

Australia Keeps Rates Steady

The Australian Central Bank kept rates at 2.75% in their latest policy announcement:

At its meeting today, the Board decided to leave the cash rate unchanged at 2.75 per cent. 

.....

 In Australia, growth over the past year has been a bit below trend. The outlook published by the Bank last month is for a similar performance in the near term and recent data are consistent with this. The unemployment rate has edged higher over the past year and growth in labour costs has moderated. Inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years. 

The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values. Further effects can be expected over time. The pace of borrowing has thus far remained relatively subdued, though recently there have been some signs of increased demand for finance by households. The exchange rate has depreciated since the previous Board meeting, although, as the Board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half. 

I'm bearish on Australia and the above comments don't change my mind.  Growth is slowing a bit.  My guess is the central bank is keeping their powder dry in the event they need to add further fuel to the fire.

Let's take a look at the relevant ETFs while we're here.

There are three important developments on the weekly chart.  First, prices have broken the trend of the rally started in the spring of 2012.  Since this break, prices have fallen to a Fib fan level for technical support.  Most importantly, the weekly MACD has given a sell signal. 

The daily chart shows the the exact same developments, but adds the further issue of prices now being below the 200 day EMA,

Gross domestic income remains positive

. - by New Deal democrat

With the second estimate of quarterly GDP comes the estimate of Gross Domestic Income. Theoretically GDI should be the mirror image of GDP, and usually it is believed over time that GDP estimates tend to be revised towards the original GDI figure. So even though it is a look in the rear view mirror - the first quarter of 2013 in this case, it has an important quality of confirmation or caution.

For the first quarter GDI confirms that the economy remained in expansion, being reported at +3.7% annualized, or 0.9% for the quarter:



And here's real, inflation adjusted GDI:



While there was definitely some softness in 2011 and a soft quarter in 2012' the certainly is no declining trend, as shown in this YoY graph:



As I have said a number of times since the beginning of the year, left to its own devices, the economy wants to expand.

John Hinderaker Demonstrates His Economic Ignorance -- Unexpectedly!

For reasons unknown, John Hinderaker thinks he has the ability to provide meaningful economic analysis when in fact the exact opposite is the case.  In the time that I've been reading his blog (over 8 years now) he has yet to get even the most basic economic concept right.

His latest demonstration of economic ignorance is his piece, Manufacturing Drops -- unexpectedly.  After citing to a Bloomberg news article, he concludes the following:

America’s slow-to-nonexistent economic growth, of which today’s manufacturing data are one of many symptoms, is the result of bad government policies: out-of-control regulations, excessive and inefficient government spending, rising tax rates and the impending disaster of Obamacare, to name the most obvious ones. Until observers are willing to acknowledge the extent to which poor government drags down the economy, they will continue to be surprised by unexpected bad news.

First, let's look at the actual report to see what it actually says.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 49 percent, a decrease of 1.7 percentage points from April's reading of 50.7 percent, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009. This month's PMI™ reading is at its lowest level since June 2009, when it registered 45.8 percent. The New Orders Index decreased in May by 3.5 percentage points to 48.8 percent, and the Production Index decreased by 4.9 percentage points to 48.6 percent. The Employment Index registered 50.1 percent, a slight decrease of 0.1 percentage point compared to April's reading of 50.2 percent. The Prices Index registered 49.5 percent, decreasing 0.5 percentage point from April, indicating that overall raw materials prices decreased from last month. Several comments from the panel indicate a flattening or softening in demand due to a sluggish economy, both domestically and globally."

For anyone who reads these reports regularly, the opening paragraph is the standard ISM report opening paragraph providing an overview of the numbers therein.  The internals are moving lower, and most are printing in the "just negative" category. Notice the emboldened sentence at the end: sluggish global demand may be playing a factor.

Here's a chart of the overall data from the St. Louis FRED system:

 
For the last 12-13 months, the data has been printing right above the 50 level, indicating an economic expansion.  So, yes, the data has for one month moved into negative territory.

Let's look to the causes listed in the report's anecdotal comments section:

• "Customers are anticipating resin price decreases and holding back orders." (Plastics & Rubber Products)
• "Slight uptick in overall business but not substantial." (Textile Mills)
• "Government spending has tightened, which has moved out program awards and caused some reduction in force." (Computer & Electronic Products)
• "Market outlook is relatively flat, with some promise of raw materials inflation relaxing." (Electrical Equipment, Appliances & Components)
• "General economy seems sluggish and pensive. Buyers are not buying much beyond lead times." (Fabricated Metal Products)
• "Downturn in European and Chinese markets is having a negative effect on our business." (Machinery)
• "We are having a difficult time hiring skilled employees." (Transportation Equipment)
• "Business continues to increase, but over the past 20 days we have seen the trend flatten." (Furniture & Related Products)
• "Market was holding strong until mid-month — then softened." (Wood Products)
• "Decline in sales for FYQ2 over same period a year ago due to softer demand [in] both domestic and exports." (Chemical Products)

First, Hinderaker claims "inefficient government spending" is a cause of the ISM slowdown.  But the anecdotal comments say the exact opposite, instead citing a tightening in government spending as a reason for the slowdown.  The last GDP report made the exact same observation: [t]he increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and exports that were partly offset by negative contributions from federal government spending and state and local government spending.   So a simple reading a few economic reports would have disabused Mr. Hinderaker of this contention. This is not analysis, but instead reading comprehension.

As for this spending being excessive, I've already demonstrated that Federal spending has in fact stalled -- see the chart in this article.  This information is confirmed by the BEA's latest GDP data.  In fact, federal spending is slowing to the point of making a meaningful dent in the budget deficit -- the development of which is conspicuously absent from Mr. Hinderaker's blog despite his protestation to being a fiscal hawk.

Also note the reference in the ISM report to a slowing global economy.  As readers of this blog know, the Chinese re-balancing and the EU depression are having ripple effects throughout the world economy.  As US manufacturing supplies both regions, simple logic would indicate these slowdowns are impacting US manufacturing.  Yet Mr. Hinderaker makes no mention of this widely known development in his "analysis."

As for the rising tax rates crushing growth, nothing could be further from the truth.  Here's a chart of total tax revenues as a percent of GDP, drawn from data provided by the CBO:

The data indicates that tax rates are among the lowest of the last 50 years.

Obviously unbeknownst to Mr. Hinderaker, the US is experiencing a post debt-deflation recovery.  It is also referred to as a balance sheet recession.  This was first outlined by Irving Fisher in the early 1930s (see the first post).  After an economy builds up too much debt, a slowdown forces liquidation.  This leads to the selling of assets, lowering prices, leading to the calling of more loans and a general slowdown of economic activity.  See also Japan for the last 20 years.  This is the reason for the slow growth.  This is the reason for the slow growth.  Anyone who actually reads economic history would know this. 

Hinderaker is a political wind-up doll: pull his string and he regurgitates the standard conservative party line.  He performs no analysis and and is remarkably devoid of meaningful economic insights.  His sole purpose is to continue particular themes, facts be damned.  And, as the facts demonstrate, he's again 100% wrong in his analysis.