ISM manufacturing suggests above trend GDP growth, decent Nov. and Dec. jobs reports

  - by New Deal democrat

I have a new post up at XE.com, showing that yesterday's good ISM manufacturing report suggests 3%+ GDP growth in the 4th quarter, as well as a minimum of 140,000 jobs added in both November and December.

US Yield Curve Is Widening

Over at XE.com

Potential Housing Bubble Keeps the Reserve Bank of Australia From Lowering Rates

This is over at XE.com

British Pound is Rallying

The above chart shows the pound verses the dollar.  Over the last few months the economic news from the UK has been very promising.  It has also been better than that coming from the US, which explains the rally that started in August.  Prices have spent the last month and a half consolidating between the 157 and 159/160 level.  But over the last few days, prices have advanced to just over 161.  A strong move upward from here would be a buy signal.

The anatomy of median wage stagnation: paltry wage increases and gyrating gas prices

 - by New Deal democrat

Periodically in the last 6 months I have written stories challenging the dominant narrative about "median household income" and "median wages." As to each measure, it has been suggested that there has been no real economic recovery because both fell since 2009.  While paltry nominal wage increases averaging only 1.8% since 2009 are an important part of the story,  at least as important has been the effect of huge swings in the price of gasoline.

In the case of "median household income," I've shown that the measure is being swamped by the trend of Boomer retirements. Retirement of a wage earner on average causes a decline of about 50% in a household's income. Since households headed by retirees are included in the data, and Boomers are retiring at the rate of about 10,000 a day, the percentage of retiree-headed households is rising, and thus the dominant secular trend in median household income is likely to continue on a downward trajectory for the next decade or more. Despite that, measures of "median household income" have increased slightly since 2011, as shown in this graph from Doug Short's monthly update using data from Sentier Research:



In this post I'm going to update my examination of the other metric, "median wages." There are four specifically median measures of median wages, one from the Social Security Administration, measured two ways, and three from the Bureau of Labor Statistics.  The former measure by the SSA was just updated for 2012 and caused a stir, because it showed a very slight further decline from 2011, but essentially this compared the situation 12-24 months ago with that of 24-36 months ago.

In my previous post, I noted that whether median real wages are declining or not depends very much on your starting point.  In summary,

1.  Real median wages did decline during the recovery from 2009 into 2012, but

2.  Real median wages actually rose during the great recession, and by roughly the same amount.

3.  Meaning that median wages measured from any period from 2007 or earlier up until the start of the Millennium have generally stagnated.

4.  The primary reason median wages rising during the worst recession in 75 years and falling thereafter is the same: real median wages (blue) have been the mirror image of gasoline prices (red):



Let's decompose this by looking at nominal wages, and the CPI.   The graph below compares the YoY change in the Employment Cost Index (one median measure)(blue), with the YoY change in consumer price inflation (red):



Between 2000 and 2007, nominal wages rose by about 3% a year - and so did consumer inflation.  Increases in nominal wages fell during and right after the recession to as low as 1.3% YoY in late 2009, and since 2011 nominal wage increases have averaged only 1.8% YoY.

By contrast, gasoline prices rose from $0.90 a gallon in early 1999 to $4.25 a gallon in July 2008, and then fell to $1.40 a gallon by the end of 2008. In 2010 and 2011 gas prices rose back from about $2.50 a gallon to as high as $3.95 a gallon. 

Since the rate of YoY change in nominal wages has been steady since 2009, the rising and falling of the inflation rate used to calculate "real" median wages was responsible for nearly all of the change in "real" median wages - and changes in consumer inflation have almost exclusively been due to changes in the price of gasoline. 

On the other hand, had nominal wages risen by 3% on average, as they had in the decade before the Great Recession, instead of 1.8%,  real wages now would be about 4% higher, and probably would have eked out a new high this year.

With that backdrop, let's update the 4 measures of median wages. Are they "still falling," as implied by some of the commentary describing the 2012 Social Security Administration release, or have they hit bottom?

The above measure by the Social Security Administration is annual net compensation and is derived from actual W-9 tax withholding forms.  Two other measures are compiled by the Bureau of Labor Statistics, which conducts the household employment survey, reports "usual weekly earnings" for full time workers each quarter.  Separately, it also keeps track of occupational employment statistics which are reported annually.  Finally, I have also included the BLS's Employment Cost Index which is also released quarterly.

Here's the table of all four calculations, updated to show the recent reports.  Remember that all measure the median, i.e., 50th percentile, and all are adjusted for inflation. The peak in wages is bolded.  One series shows a bottom, and that is italicized:

Year	Social Security	Usual weekly earnings	Occupational Employment	Employment Cost Index
1999	27,164	---	---	---
2000	27,374	---	---	---
2001	27,713	---	16.78	116.3
2002	27,784	---	16.95	117.2
2003	27,657	---	16.91	118.0
2004	27,903	785	16.80	117.3
2005	27,331	774	16.71	116.3
2006	27,832	774	16.80	116.8
2007	27,984	778	16.70	115.9
2008	27,468	778	17.22	119.7
2009	27,584	801	17.12	117.9
2010	27,382	797	17.13	118.1
2011	26,963	781	16.86	116.6
2012	26.959	778	16.71	116.7

According to my calculations, the employment cost index for wages bottomed in 2011 and rose slightly in 2012, while real median wages were down ever so slightly in 2012.

The decline in each series from peak to trough is -3.6% for Social Security, -3.4% for hourly adjusted Social Security, -4.1% for usual weekly wages, -3.0% for the employment estimates, and -2.6% for the Employment Cost Index.

Two of the above series, Usual Weekly Wages and the Employment Cost Index, are updated quarterly, se can get a more granular look at wage trends, and also see how 2013 is shaping up so far.  The below table does that, starting with the first quarter of 2007:

Quarter	usual weekly earnings	Employment Cost Index
Q1 2007	336	118.5
Q2	335	118.1
Q3	336	118.2
Q4	332	117.7
Q1 2008	335	117.4
Q2	335	116.7
Q3	331	115.6
Q4	340	118.8
Q1 2009	344	120.0
Q2	345	119.7
Q3	345	119.1
Q4	344	118.6
Q1 2010	344	118.9
Q2	342	119.5
Q3	342	119.6
Q4	342	119.2
Q1 2011	338	118.3
Q2	336	117.6
Q3	336	117.2
Q4	335	117.3
Q1 2012	335	117.2
Q2	337	117.5
Q3	333	117.1
Q4	334	117.3
Q1 2013	331	117.3
Q2	334	117.7
Q2	333	117.6

The above quarterly data shows that the decline in real median wages appears to have stopped in the third quarter of 2012, and the Employment Cost Index to have bottomed in the first quarter of 2013.

In summary, in the longer view since the turn of the Millenium, real median wages have stagnated.  Gas prices caused them to rise during the recession, and then decline thereafter as the effects of those gas prices filtered through the economy, and nominal wage increases averaged a poor +1.8% annually. Annual measures which have only been updated through 2012 do not yet show a bottom, but more timely quarterly measures suggest that, with the slight decline in YoY gas prices for most of 2013, real median wages have risen slightly.

Junk Bond ETF Breaking Out on Daily Chart

The junk bond ETF (JNK) has been in a short rally since mid-August.  Prices moved through the upper 39 level in mid-October, pulling the shorter EMAs with them.  Momentum is about to print a buying signal and money is flowing into the market.

The weekly chart also shows a strong multi-yearrally that started in the 3Q11 and continues to this day.  Prices have followed a very nice pattern of rallying followed by consolidation.  Also note the technical confirmation from both the MACD and CMF.

International Week in Review

Is up over at XE.com

Weekly Indicators for November 25-29 at XE.com

- by New Deal democrat

This week's Weekly Indicator piece is up at XE.com .  This was another very positive week, but with consumer spending turning more cautious.

As always, if the link doesn't take you directly to the piece, click on "Forum" at the far right of the top toolbar, then click on "Market Analysis" and it should be the first or second item on the list.

Consumer inflation for November likely +0.3%

- by New Deal democrat

Since July, I have been using the change in the price of a gallon of gas as a simple method to forecast that month's CPI in advance. My point has been, that all you really need to know about inflation is the price of gasoline. So far each prediction has turned out to be within 0.1% of the actual number.

For October I predicted a decline of -0.1%, which was the actual reported result, making the YoY inflation rate +0.9%, also exactly as predicted:



On Monday the E.I.A. reported gas prices for the final week of November, so we can estimate November's inflation rate now. My method is to take the change in the price of a gallon of gas and divide by ten, then add 0.1% to 0.2% to account for core inflation, or else divide by 16 to be more conservative, to arrive at the non-seasonally adjusted inflation rate.

In October the average price of a gallon of gas was $3.34.4. This month it was $3.29.7. That is a -1.4% decline. Whether we divide by 10 or 16, the rounded result is -0.1%, and adding 0.1% to 0.2% gives us a flat 0.0% change.

The seasonal adjustment for November last year was +0.3%. This gives us a final seasonally adjusted inflation rate that rounds to +0.3%.

That will replace last October's +0.0% inflation rate, so that the YoY inflation rate will be approximately +1.2%.

This inflation rate remains subdued enough to suggest that real YoY wages have probably increased again in November, although the monthly change is likely to be slightly negative:



Note, graph above is though October.

FDR's Thanksgiving Day proclamation, 1943

By the President of the United States of America

A Proclamation

God’s help to us has been great in this year of march towards world-wide liberty. In brotherhood with warriors of other United Nations our gallant men have won victories, have freed our homes from fear, have made tyranny tremble, and have laid the foundation for freedom of life in a world which will be free.

Our forges and hearths and mills have wrought well; and our weapons have not failed. Our farmers, victory gardeners, and crop volunteers have gathered and stored a heavy harvest in the barns and bins and cellars. Our total food production for the year is the greatest in the annals of our country.

For all these things we are devoutly thankful, knowing also that so great mercies exact from us the greatest measure of sacrifice and service.

Now, Therefore, I, Franklin D. Roosevelt, President of the United States of America, do hereby designate Thursday, November 25, 1943, as a day for expressing our thanks to God for His blessings. November having been set aside as "Food Fights for Freedom" month, it is fitting that Thanksgiving Day be made the culmination of the observance of the month by a high resolve on the part of all to produce and save food and to "share and play square" with food.

May we on Thanksgiving Day and on every day express our gratitude and zealously devote ourselves to our duties as individuals and as a nation. May each of us dedicate his utmost efforts to speeding the victory which will bring new opportunities for peace and brotherhood among men.

In Witness Whereof, I have hereunto set my hand and caused the seal of the United States of America to be affixed.

DONE at the City of Washington this 11th day of November, in the year of our Lord nineteen hundred and forty-three, and of the Independence of the United States of America the one hundred and sixty-eighth.

October's housing permits report was the single best piece of US economic news since April

 - by New Deal democrat

I have a new post up a XE.com . October's housing permits report was the single best piece of US economic data since interest rates started backing up in April.

As usual, if for some reason the link doesn't take you directly there, click on "forum" at the right end of the toolbar, then click on "Market Analysis" and it should be the first or second topic in the list.

Asian Markets Less Japan Hitting Strong Resistance in Lower 60s

Above is a weekly chart for the all Asia less Japan ETF.  Over the last three years, prices have continued to hit resistance in the lower 60s -- a feat they've done no less than seven times.  That gives this price level an incredibly large amount of influence over this chart.

So -- why has this happened.  At various times over the last three years the Asian markets have potentially run into problems, usually related to China.  These concerns are usually related to the PBOC engaging in some type of behavior to drain excess liquidity from the system.

Finally, I'm not so sure I like the call that the chart has a reverse head and shoulders over the last few months.  However, I've seen other analysts make similar calls with charts that I think were pretty questionable.

Cattle ETF Breaks Support

Above is a chart for the cattle ETF.  There were two upward sloping trendlines; one connecting the lows of mid-May and early August and a second connecting the lows of early August and late October.  

Over the last two weeks, prices have broken both trend lines.  This has been accompanied by a decline in momentum and a clear drop in volume inflow.

The logical price target right now is 26.75.

Keeping the Social Security Trust Fund solvent forever is even easier than I thought

  - by New Deal democrat

After I posted "A Plan to Keep Social Security solvent forever" last week, Bruce Webb, one of the authors of the "Northwest Plan" that keeps Social Security solvent exclusively by gradually increasing payroll withholding taxes, informed me that I had misconstrued their math.  Their plan does indeed call for withholding taxes to rise 2%, but it is 2% including both the employer's and employee's share.  In other words, the employee's share does not rise from 6.2% to 8.2%, but only to 7.2%.  The employer's share also rises to 7.2%, so the total tax withheld increases from 12.4% to 14.4%.

To reiterate the essence of what I wrote last week, I wanted to see what would be necessary if we made "baby steps" extremely small and gradual changes in each of the proposed fixes for Social Security.  Once the present issue of Boomer retirements is dealt with, the plan relies upon using the Social Security Trustees' Report projecting the condition of the fund 20 years out, and automatically making small adjustments each year in the direction needed to balance the Fund over that time frame -- including rebating withholding taxes paid if the Trust Fund is overfunded.

Specifically, in every year where the Trustees report that the Fund will be underfunded by at least 5% 20 years out, the following measures (none of which would apply to current recipients) are taken:

• 1. The percent of total earned income collected by the fund increases by 1%, and continues to rise by 1% a year until it reaches 90% of all earned income! the percentage it was in the early decades of the program.
• 2. Withholding taxes increase by 0.1%.  For example, in the first such year withholding taxes increase from 6.2% to 6.3%.
• 3. The age at which persons qualify for benefits, and to qualify for full benefits, increases by one month.
• 4. The annual cost of living increase is reduced by 0.1% a year for 10 years (meaning a 1% cut in benefits 10 years out).

The process would get repeated every year until the Trustees report that the Fund is not projected to have any shortfall 20 years out.  Raising the amount of income captured to 90% of all income in 1% annual steps should be done regardless of the status of the other steps, since that is the level of income that in earlier times was subject to withholding.

Based on my understanding of the revenue that would be generated by a gradual increase in withholding taxes, I estimated that it would require about 5 years of such baby steps to bring the current shortfall in the Trust Fund to zero.

But now we know that increases in the withholding tax rate would bring in double the revenue I originally estimated.  Based on this, under the above formula it appears that only 3 years of "baby steps" would be needed.  If the plan were to take effect in 2014, then by 2017, tax withholding by employees would be increased from 6.2% to 6.5%, the retirement age far full benefits would be raised by 3 additional months, and only a 3% cut in benefits implemented over 13 years to new retirees would be necessary.

A 3% decrease in the average annual benefit of roughly $1225.45 a month, or $14,305.40 a year, is  about $38 a month, or $430 a year (13 years from now, only as to new beneficiaries). 

Suppose an actual cut in benefits, even of 3%, is a bridge too far.  We can still overcome the current anticipated shortfall by increasing withholding taxes by 0.4% to 6.6%, implemented over as long as a 20 year period, and gradually increase the retirement age for full benefits by an additional 4 months, so that by 20 years from now, the retirement age for full benefits would be 67 years and 4 months.

This is a far cry from the fiscal Armageddon that is constantly trumpeted in the mainstream media, and far more generous than the "death by 1000 cuts" permanent change to a chain-weighted CPI which has been touted by President Obama.

Now that we've put the Trust Fund in permanent actuarial solvency, we still have to deal with how the general fund should pay back the Trust Fund for its borrowing over the last 30 years - a borrowing that, in one form or another, was inevitable and broadly legitimate.  As we'll see, that isn't as difficult as Doomers make it out to be, either.

Looks Like an End of the Year Melt Up For US Markets

From Bloomberg:

Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising.

Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. (MORN) estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.

The real tell for the rally will be in the IWMs and QQQs.  Consider the following charts:

Both the IWMs (top chart) and QQQs (bottom chart) have been rallying since mid-Spring.  All the EMAs are moving higher indicating a short, intermediate and long term rising trend.  Both also have MACDs with have decreased but with both also printing or just about to print by signals.

Weekly indicators for November 18 - 22 at XE.com

 - by New Deal democrat

Weekly indicators for the week of November 18 - 22 are up at xe.com.  Generally good, but that interest rates are still elevated over their lows and are impacting the housing market is an increasing concern.

If for any reason the link doesn't work, go to XE.com, then click on the "forum" heading at the right end of the top toolbar, then click on the "Market Analysis" section and it should be the first topic.

Household deleveraging stabilizes at record low levels

-by New Deal democrat

The Federal Reserve's report on household debt burdens was released a couple of weeks ago, covering the March - June quarter. According to the bank,

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

Both measures declined slightly.  Since the last quarter of last year, they have stabilized at record low levels for both series.  I've combined the two measures into a single graph:



Both debt service payments (blue line) and total household onligations (red line) are now less than at any time in the 33 year this data has been kept.

I long suspected that, before this cycle was over, households would set new all time lows for debt service. That has now come to pass.  I believe this new frugality will last for a generation,.

Abenomics Is Working So Far

This is up over at XE.com.

Great idea. Now how do we pay for it?

 - by New Deal democrat

Franklin Delano Roosevelt was a political genius. He deliberately designed Social Security as a social insurance program into which virtually everybody paid, and virtually everybody benefited. By so doing, he ensured that the program would have the broadest possible support, and would withstand GOP attempts to destroy it.

That genius is showing even now, as 5 years into the term of a President who has repeatedly put cuts in Social Security benefits "on the table," and with the most reactionary GOP House majority in nearly a century, Social Security remains intact.

Let me be blunt about FDR's genius:  the moment SS is turned into a welfare program, it is dead.  It will not survive even one generation.

So while I agree with calls to increase the well being of seniors, who have been disastrously failed by private pensions being abrogated in bankruptcy, and by 401k plans that require them to be investment geniuses, and I also applaud moving the Overton window, so that we are discussing expanding, rather than cutting, middle class programs. .. , I have a question for Profs. Mark Thoma, -Paul Krugman,  Elizabeth Warren, andDuncan Black .

How are you going to pay for it?

If you believe that SS should pay those benefits, (as opposed to some separate program paid for out of the general fund), and you don't fund them, or you are unable to explain why the lower  interest rate bound means we can just print the money (if you believe that is true), then you have just signed Social Security's death warrant.

Lowest inflation in 50 years (ex-great recession) helps wages, jobs

  - by New Deal democrat

I've been saying for months that all you really need to know in order to estimate inflation is the prices of gasoline, and exactly as I predicted 3 weeks ago, the decline in gas prices to a near three year low caused October consumer prices to decline -0.1%, and YoY inflation to come in at +0.9%, the lowest inflation rate in 50 years outside of the Great Recession.  Here's the graph:




As a result of the nearly non-existent inflation, real wages have continued to improve, and are now only 1.2% below their 2010 peak:




October Retail sales also came in strong yesterday, at +0.4%.  This means that real retail sales increased +0.5%.

A long time ago, I pointed out that real retail sales are a particularly good leading indicator for jobs.  The YoY comparison in real retail sales had been declining, although still positive, coming into this year, but again, almost certainly due to the loosening of the Oil choke collar, the trend in YoY real retail sales has improved, as shown in the below graph in blue:



Shown in red in the above graph is the YoY change in jobs.  First of all, as I said above, real retail sales are a good leading indicator for jobs.  Note that since 2011, as the trend in sales decreased, so did the trend in jobs, with a lag.  Now that the trend in sales is increasing, albeit slightly, the trend in jobs looks like it is turning up slightly as well.  October sales suggest that the YoY trend in jobs should continue to improve for the next few months.