Weekly Indicators for December 19 - 23 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

There has really been a shift in much of the data since the presidential election.  On the one hand, interest rates have spiked, as has to some extent the US$ and at least one measure of risk in bank lending rates. Gas prices continue to trend in the direction of becoming a headwind.

Interestingly, for the last several weeks holiday consumer spending as measured by Gallup has also weakened -- which is completely at variance from the surge since the election in consumer sentiment as measured both by Gallup and monthly by the University of Michigan.

This negativity is also at odds with the surge in the stock market.

It may be that the fortunes of producers and consumers are about to diverge in a big way.

How Long Until John Hinderaker Writes Similar Praise of Trump?

     Merriam-Webster offers the following definition and example of the word Sycophant:

1.) a servile self-seeking flatterer

Parasite, sycophant, toady, leech, sponge mean a usually obsequious flatterer or self-seeker. parasite applies to one who clings to a person of wealth, power, or influence or is useless to society . sycophant adds to this a strong suggestion of fawning, flattery, or adulation . toady emphasizes the servility and snobbery of the self-seeker . leech stresses persistence in clinging to or bleeding another for one's own advantage . sponge stresses the parasitic laziness, dependence, and opportunism of the cadger .

The connotation is clearly negative; a sycophant is someone who eventually becomes a pure apologist for the worst sorts of behavior.

Hinderaker has unfailingly towed the conservative Republican party line, regardless of how ridiculous.  He is a proud member of the flat earth society, denying the idea of human-caused global warming (this, despite the fact that Hinderaker has no formal scientific qualifications).  He believed that the Fed's 2008 policy would lead to hyper-inflation (interestingly enough, Hinderaker has written nothing about the post-election jump in inflation expectations).  Other examples abound.

     In 2005, Hinderaker penned a post, titled, "A Stroke of Genius?"  It contains this bootlicking paragraph:

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.

After receiving a large amount of well-deserved ridicule, Hinderker added the following to the post:

UPDATE: Of all the thousands of posts we have done over the years, this one seems to most outrage the Left, I suppose because it is so at odds with liberals’ cherished illusions about President Bush. The tone of the post is obviously tongue in cheek, but liberals never seem to notice. They are, to put it charitably, not big on nuance. More important, I’ve never seen a liberal respond to, let alone rebut, the point of the post: that President Bush’s proposal to share pollution control technology with the countries where carbon emissions are rising most rapidly made far more sense than the Kyoto approach, which combined ineffectiveness with economic disaster. That, too, is a sign of the intellectual vacuity of modern liberalism.

He obviously tried to walk back his obsequious statement, but to little avail.

Given that Hinderaker is a Republican toady, how long until he pens a similar defense of Trump?

The post-election interest rate spike isn't signaling a recession -- yet

 - by New Deal democrat

This post is up over at XE.com .

XE is currently having a problem posting images.  So here are the three images that go with that post:

Treasury yields vs. 30 year mortgage rates:

Mortgage rates (inverted) vs. housing permits since the Great Recession:

Morrtgage rates (inverted) vs. housing permits in the 1970s and 1980s:

Thoughts on Post-Election Industry Movement

The above table from Stockcharts.com shows the post-election percentage change in the largest sector ETFs.  Here are some thoughts on why certain sectors have rallied or sold off.

1.) There has been talk of repealing or scaling back Dodd-Frank, which could potentially be a huge boon to the financial industry.  In addition, the Fed is now raising interest rates, which increases the interest rate spread, which should increase bank earnings. 

2.) Industrials and basic materials are rallying in hopes of a large infrastructure bill.

3.) Trump has appointed a very pro-oil cabinet: Perry at the Department of Energy and Rex Tillerson as Secretary of State.  In addition, OPEC has agreed to limit production.  Both these facts explain the XLE's recent rally.   

4.) There is a great deal of concern underlying health-care policy.  The pending ACA repeal will put the insurance markets on very tenuous footing.  In addition, there is growing concern that Congress will become more aggressive about drug prices (see this story from today's NYTimes).   

5.) Rising interest rates are a net negative for utilities.

6.) The 10 largest consumer staple stocks are multi-national companies.  The strong dollar and Trump's anti-trade talk would be a net negative for this sector.

Energy Inflation Is Increasing and May Place the Fed in a Policy Bind Next year

Energy Inflation is increasing:

Saudi Arabia's massive production cut in 2014 sent oil prices lower, causing a large economic boost to consumer spending.  Earlier this month, OPEC reversed course, signing a deal that cut production. This was the primary reason for the latest rally in the oil market.  According to Bloomberg, bullish oil bets are currently at a 2-year high.  

All of these factors will cause an increase in energy inflation, which may place the Fed in a policy bind.  Overall CPI is hovering around 2%: core is 2.1% while overall is 1.7%.  But as the chart above shows, energy prices are starting to accelerate, which will push overall CPI closer to the Fed's 2% target.    

"Those who cannot see must feel"

 - by New Deal democrat

That's the translation of an old German saying that I used to hear from my grandmother when I misbehaved.  It is pretty clear that, over the next four years, the American public is going to do a lot of feeling (including, unfortunately the plurality of voters who *did* see).  The results will range somewhere in between bad, disastrous, catastrophic, and cataclysmic, depending on how badly foreign affairs are bungled and how much basic norms of republican government irreversibly give way to despotism.  

I have some hope as to the former because both China and Russia are smart enough to figure out that they can get what they want by bribing Trump without resorting to armed conflict.  As to the latter, unfortunately, I hold out little hope.  Already North Carolina has crossed the line into Banana Republic-dom, and there is not the slightest reason to believe Trump will allow himself to be constrained by, well, anything.

On my to-do list is to go through a list I have been given of every country in the world which has a Madisonian presidential system, to see if any of them have not somewhere along the line fallen into despotism.  I believe that the answer until now has been that the US is the only country which had not succumbed. Someday if and when the Second American Republic is assembled, diluting or eliminating the powers of the Presidency are essential.

In the meantime the autocrat will have his day.  After all, no fascist ever was overthrown so long as they were winning.

But ... this is a good time to repeat that my view of economics dictates my politics, not the other way around.  Libertarians and neoliberal economists fail by not taking into account bargaining power.  They take contracts as a given, to be neutrally enforced by Solomonic courts. But contracts - and their enforcement - have everything to do with bargaining power, and left to their own devices, as the saying goes, "Thims that has, gits." Thus, over time, without a countervaling force, economies tend towards oligopolies and polities to oligarchies.

And all of that gets revealed in the numbers over time.  So my view is, all I have to do is faithfully report the economic numbers, and the political argument follows.  Go back 100 years and compare the economic records of Democratic and Republican administrations, and the record speaks for itself.  Most Democratic administration beat most Republican administrations.  Outside of the high inflation era of the late 1970s early 80s, where a  supply-side stimulus was helpful and non-inflationary, demand side economics which target ordinary Americans works better to improve their lot.  In simple terms, give a wealthy man money and he will hoard most of it.  Give an ordinary person money and they will spend it. Spending has a bigger multiplier effect than hoarding.

I have no illusion that we can do anything to prevent what is now directly in front of us.  But its results will be in the numbers -- particularly in wages, income, and employment.  I will continue to report them faithfully, and continue to tell you based on the numbers how I expect the next months and several years to unfold.

For now, I see no recession in the next 9 months.  If anything, I expect pretty good numbers over the next 3 to 6 months.  But the next recession is out there somewhere, its stage beginning to be set in the long leading indicators. There is every reason to believe it will feature outright wage deflation (i.e., carrying debt into the recession will be unusually toxic), and there is no reason to believe that the new regime will pursue any means that will help ameliorate it.

I will report the numbers as straightforwardly as I can to help you brace yourself.

Weekly Indicators for December 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

As usual for this time of year, there is lots of seasonal volatility. That being said, the recent surge in positive readings for coincident and short leading indicators came to a halt.  Maybe it's just noixe, we'll see.

Tell Me Again How Oil Extraction Is the Panacea for Employment Growth?

The top chart shows the total number of employees in the oil extraction area.  Yes, it increased from 120,000-200,000 between 2005 and 2015.  That's a whopping 80,000.  But as the bottom chart shows, the total number of oil jobs is still less than 1% of all payroll jobs.  

Let's assume a 4-1 multiplier effect -- for every 1 oil extraction job created, 4 additional jobs are created.  That would only be a total of 320,000 jobs -- about 2-3 months of job gains at the current pace of creation.

There's just not much here from an employment perspective.

November housing permits continue positive news

 - by New Deal democrat

This is one of those days where the St. Louis FRED is slow adding the new data, so no snazzy graphs, BUT ...

This morning's housing data was a positive, even though it generally retreated from last month.

1. Single family permits made another post-recession high.

2. Total permits were over 1200/month for 3 months in a row, the first time that has happened in 9 years.

3. With the exception of the 3 month period including June of 2015, which saw big distortions due to multifamily permits issued in NYC to be included in an incentive program, this was the highest 3 month average for permits in 9 years.

The only negative was that actual housing starts retreated, and the 3 month average was no better than run of the mill for this year.  Since I favor the less volatile permits metric, and discount the NYC distortions, on balance this month was a significant positive.

I expect positive readings to continue for the next several months as last July's post-Brexit lows in interest rates continue to show up in new housing.  The negative whipsaw from the increase in rates since the US presidential election will start later.

More evidence 2017 will feature late cycle inflation

 - by New Deal democrat

Yesterday's Fed rate hike and this morning's CPI both support the idea that 2017 is likely to feature typical late cycle inflation -- being chased by the Fed.

This post is up at XE.com.

A Conservative Commentator's Technical Analysis of the SPYs

2016 Economic Year in Review and 2017 Projection

This is up at XE.com

Five graphs for 2016: final update

 - by New Deal democrat

At the beginning of this year, I identified graphs of 5 aspects of the economy that I particularly wanted to watch.  Now that the year is ending, let's take one final look back.

#5 The Yield Curve

The Fed attempted to embark on a tightening regimen last December.  The question became, would the yield curve compress or, worse, invert, an inversion being a nearly infallible sign of a recession to come in about 12 months.  It turned out that the weakness in the world economy plus Brexit put the Fed on hold (until now) and only caused a moderate compression at the long end -- which has now reversed: 

The bottom line is that the recession fears based on an allegedly compressing yield curve were unfounded.  Alll year long he yield curve remained quite positive when seen in a historical perspective.  Presumably the steepening since the US Presidential election, as traders consider a stimulus that may be inflationary, will sideline the clams of DOOOM from this particular metric.

#4 The trade weighted US$

Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US$ that began in late 2014 -- which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.

Here there was a big change, even with the surg-ette since the election:

Against all currencies, the US$ remained in a range of unchanged to +3% YoY  - a  more  typical if still elevated range.  Against major currencies, the US$ actually was down YoY for most of this year..   This was good news.  It may be changing in 2017.

#3 The inventory to sales ratio

An elevated ratio of business inventories to sales means that businesses are overstocked.  This has frequently but not always been associated with a recession.  I have been using the wholesalers invenotry to sales ratio, since it has fewer secular issues.  This was perhaps the  most bearish graph of all one year ago, as it was in a range that frequently coincided with recessions.  It made a peak early this year, and declined slowly thereafter -- until the October report released last week:

The decline from peak accurately indicated that the "shallow industrial recession" of 2015 was ending.  Even better, decomposing sales (blue in the graph below) vs. inventories (red) shows us that sales have increased smartly while inventories continue to decline - a bullish sign typically seen in the first year after the end of a recession:

#2 Discouraged workers

While 2015 saw a big improvement in involuntary part time employment, this trend completely stalled this year, with the sole exception of last week's report for November:

We are still at least 1,500,000 above a "good" number.  Worse, this kind of stall is something that we see as a cycle is approaching its peak.  This failure to make further progress is a big concern about the labor market going forward.

#1 Underemployment and wages

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

There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers as discussed above.

This expanded "U6" unemployment rate ( minus 10%)  is shown in red in the graph below, together with YoY nominal wage growth (blue) (minus 2%):

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  U6 has been under 10% for close to a year,, and while there has been some mild improvement off the bottom for wage growth, it has never even come close to 3% YoY  

More than anything, the US needs real wage growth for labor, and the present nominal reading of  2.4% still isn't nearly good enough.  With the expansion in deceleration mode well past mid-cycle, it is not clear at all how much further improvement we are going to get before the next recession hits.

To close out 2016, three of the concerns -- the yield curve, the inventory to sales ratio, and the overly strong US$ -- abated at least in part.  The tow concerns I had about workers and their wages, however, both remain elevated, and are not encouraging, particularly if the next recession should happen within the next couple of years.  

Weekly Indicators for December 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.

A negative trifecta is developing (we're not quite there yet) of interest rates, US$ appreciation, and gas prices.

October JOLTS and Labor Market Conditions Index positive but meh

 - by New Deal democrat

The JOLTS Survey and the Labor Market Conditions Index are two metrics with great promise, but like those surveys, but suffer by not having a long enough real-time history to use with full confidence.

In the case of the JOLTS survey, there is now a clear divergeance between the pattern during this expansion and the only full sample of the prior expansion. 

Here's job openings (blue),  hires (red), and quits (green, right scale) since the first bottom in 2003: 

In the one and only complete cycle since the series began, hires and quits peaked first, while openings continued to increase until shortly before the onset of the 2008 recession.  During this cycle, hires have gone sideways for over a year, while openings continued to rise until recently, and now appear to be rolling over.  Meanwhile quits, while down this month, are still at a new high on a 3-month rolling average. 

So, In the last cycle, YoY job openings held up until nearly the end.  This time around, it appears at least for now that openings may be turning before quits.  Unless job openings make new highs in the months ahead, this cycle will not match the last one.  We just don't have enough history with the JOLTS series to know which resolution is more likely.

In the past, employment growth (which is the net of hiring over firing) decelerates markedly before layoffs begin to increase.  JOLTS now breaks that down into hiring and discharges, shown below:

Hiring looks like it shows late cycle deceleration, but this has not translated into any increase in layoffs and discharges.  Here's a close-up of the last year from the graph above

Turning to the Labor Market Conditions Index, the problem is backfitting, since the underlying data goes back half a century, but the index itself was only created a few years ago.  We need to see how it performs in real time.

Earlier this year there were some poor, negative readings leading some Doomers to holler "recession!" but these have largely been revised away:

As you can see, the most recent reading (for October) was also positive.

The recent upturn in housing should translate into increase spending, and thus increased employment, in the next 6-12 months, so I expect further positive readings here over the near term.

Bottom line: for the economic expansion, there is no sign in these two metrics that Indian Summer will give way to the Gales of November anytime soon.

2017 is increasingly looking like a year of inflation

 - by New Deal democrat

As things stand presently, it increasingly like 2017 will be a year where inflation finally exceeds 2%, leading to Fed rate hikes in a classic late-cycle trend.

This post is up at XE.com.

Housing forecast for 2017

 - by New Deal democrat

This post is up at XE.com.  How, and when, can we expect the see-saw that has been interest rates in 2016, to affect the housing market in 2017?

My Columns Are Up At XE.com

International Economic Week in Review

Bond Market Week in Review

Equity Week in Review

Weekly Indicators for November 28 - December 2 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

While the present and near future forecast look sunny, the broad US$ joined interest rates as an important negative this week.

November jobs report: good unemployment news, faltering wage growth

- by New Deal democrat

HEADLINES:

• +178,000 jobs added
• U3 unemployment rate down -0.3% from 4.9% to 4.6%
• U6 underemployment rate down -0.2% from 9.5% to 9.3%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now: down -36,000 from 5.912 million to 5.876 million  
• Part time for economic reasons: down -220,000 from 5.889 million to 5.669 million
• Employment/population ratio ages 25-54: down -0.1% from 78.2% to 78.1% 
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.02 from $21.71 to $21.73,  up +2.4% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

September was revised upward by +17,000, but October was revised downward by -19,000, for a net change of -2,000. 

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 declined -0.2 from 40.9 to 40.7 hours.  This is one of the 10 components of the LEI, and is a negative.
 
• construction jobs increased by +19,000 YoY construction jobs are up 155,000.  
 
• manufacturing jobs decreased by -4,000, and are down -54,000 YoY

• temporary jobs increased by +14,300, a new high.


• the number of people unemployed for 5 weeks or less increased by +24,000 from 2,397,000 to 2,421,000.  The post-recession low was set 1 year ago at 2,095,000.

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

• Overtime was unchanged at 3.3 hours.
• Professional and business employment (generally higher- paying jobs) increased by +63,000 and are up +571,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.1  from  106.0 to 106.1 

•  the index of aggregate payrolls was unchanged at 131.3 . 

Other news included:         

• the alternate jobs number contained  in the more volatile household survey increased by  +160,000 jobs.  This represents an increase  of 2,641,000  jobs YoY vs. 2,253,000 in the establishment survey.    
   
• Government jobs rose by +22,000.     

• the overall employment  to  population ratio for all ages 16 and up was unchanged at  59.7%  m/m and is up +0.3% Y oY.   
• The  labor force participation rate fell -0.1% from 62. 8% to 62.7% and is up +0.2% YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY 

This was a good headline report with mixed internals. The good news was mainly in the underemployment and underemployment rates, which both fell to new lows, as did the number of those part time for economic reasons. That temporary employment is making new highs is also a good leading indicator for the rest of the jobs market.

The bad news primarily came in faltering wage growth, which fell to +2.4% YoY, and aggregate real wages, which also fell.

Again, a good late cycle "Indian Summer" employment report, but one that if anything amplifies my concern that in the next recession we will see actual wage deflation for the first time in 80 years.