Weekly Indicators for October 16 - 20 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The divergence between the long term and short term forecasts that became apparent las week continues.

Linkfest

Brexit news only gets worse (NYT)
Brexit talks are failing (BB)
Money flows into corporates, out of governments (BB)
Inequality can now be seen at the neighborhood level (BI)
At least he's not a closet indexer (Marketwatch)
Is China now the largest economy? (BB)
5 takeaways from Xis speech (NYT)
ISIS will return to its insurgency roots (NYT)
The situation in Spain is degrading (NYT)
How Thelonius Monk took over the world (The Atlantic)
Have insurance companies made billions from the ACA (No).  (WaPo)
The Beige Book (FRB)
Zombie Brexit Ideas (FT)
Japanese IP is screaming higher (METI)

September housing permits and starts: the slowdown continues

 - by New Deal democrat

My take on September housing permits and starts is up at XE.com.

I have a fundamental difference of opinion from Bill McBride a/k/a Calculated Risk as to whether the drivers exist for significant continued growth in the housing market during this expansion.

"Hurricane adjusting" initial claims has proven its value

 - by New Deal democrat

For the last month, I deduced a "hurricane adjusted" number for initial claims, which showed that the previous underlying positive trend was intact, with the four week average remaining in the 230,000's.

That approach was borne out by this week's report, which, at 222,000, was the lowest since 1973.

Although I haven't gone through the entire formal exercise, here's how the numbers from the three affected jurisdictions compared in last week's report compared with one year previously:

FL 13,861 (+6508 from 2016)

TX 16,656 (-225 from 2016)

PR 250 (-2409 from 2016) (DoL estimate)

Net change: +3904 from 2016

Since the seasonal adjustment last week was only ~6%, (244,000 vs. 229,289 NSA), this means last week's "hurricane adjusted" number was on the order of 239,000 or 240,000.

Natural disasters will continue to strike. I am confident that the method I used in 2012 after Sandy, and again this past month, is a good way to distill the underlying trend from the disaster disturbance.

Labor Market Slack and Weak Wage Growth

From the IMF's latest World Economic Outlook:

Sluggishness in core inflation in advanced economies—a surprise in view of stronger than expected activity—has coincided with slow transmission of declining unemployment rates into faster wage growth. Real wages in most large advanced economies have moved broadly with labor productivity in recent years, as indicated by flat labor income shares (Figure 1.4, panel 6). As shown in Chapter 2, muted growth in nominal wages in recent years partly reflects sluggishness in labor productivity.1 However, the analysis also reveals continued spare capacity in labor markets as a key drag: wage growth has been particularly soft where unemployment and the share of workers involuntarily working part-time remain high. The corollary of this finding is that, once firms and workers become more confident in the outlook, and labor markets tighten, wages should accelerate. In the short term, higher wages should feed into higher unit labor costs (unless productivity picks up), and higher Sluggishness in core inflation in advanced economies—a surprise in view of stronger-than expected activity—has coincided with slow transmission of declining unemployment rates into faster wage growth. Real wages in most large advanced economies have moved broadly with labor productivity in recent years, as indicated by flat labor income shares (Figure 1.4, panel 6). 

     Consider the following chart from the Atlanta Fed:

For the longest time, I've been staring at the lower left-hand corner of that chart and thinking, "weak wages are really about low utilization."  Let's place that data into context:

The above chart shows the absolute number of employees working part-time for economic reasons.  The total number -- after 8 years of economic growth -- is only now returning to the heights of the previous expansion.  

     Here's another chart of the data:

This chart (better known as the U-6 unemployment rate) presents the information in a percentage format.  This statistic was 10% at the beginning of 2016, which was the highest level of the previous recession.  But during this expansion, we hit this level a full seven years after the recession ended.  That's quite a delay.  

     The excerpt from the IMF report adds two key pieces to this puzzle: First, the US is not the only country experiencing weak labor utilization and a corresponding weak wage growth.  In fact, The IMF strongly implies this also seems to go hand-in-hand with the weak pace of global inflation.  Second, the IMF has research that links these two concepts.     

Underlying industrial production trend ex-hurricanes remains positive

 - by New Deal democrat

A few weeks ago, I suggested a hurricane workaround for industrial production. That approach was to average the four regional Fed indexes excluding Dallas, and add the Chicago PMI, and finally discount for the unusual strength this year in these regional indexes vs. production.

Here was my conclusion:

The average of the 5 is 22.9.
Dividing that by 5 gives us +.5.
Subtracting .3 gives us +.2. 

We can be reasonably confident that underlying trend in industrial production in September, despite the hurricanes, has been positive.

That approach was borne out yesterday when overall September Industrial Production was reported at +0.3%, with manufacturing production up +0.1% as shown in the graphs below.:

First, here's the longer term view,. Note that the decline in 2015 was due to weakness confined to the Oil Patch:

Here is the close-up of this year:

That's the good news.  The bad news, of course, is that even with this improvement, the big (revised) August decline of -0.7% in production, and -0.2% in manufacturing has not been overcome, and production is still below where it was this spring.

If we were to apply the same workaround for August as we did for September, however, the forecast would have been a manufacturing reading of +0.2% for that month as well.  That would be enough to put us slightly above where manufacturing production was earlier this year.  Indeed, the Fed suggested that but for the hurricanes, September would have been +0.25% higher.

So despite the softness in industrial production the past few months, I believe the overall trend remains slightly positive and not suggestive of any underlying downturn in the economy.
                           

-- From Bonddad

Something to remember about industrial production is that, this cycle, it is the weakest coincident indicator.  Consider the following two charts:

The top chart shows the overall industrial production index, which peaked in the first half of 2014, dipped and has since risen a bit.  But it is still about the same level as the last expansion's peak.  The bottom chart explains why.  When we break the index down into market groups, we only mining (above in green) has done well.  Manufacturing (in blue) and electricity production (in red) have been trending sideways since early 2012.

About This "Renegotiating NAFTA" Thing ...

While I'm sympathetic to the plight of that percentage of the U.S. population that has seen stagnant wage growth for the last 30-40 years, I also think it's important to highlight the data underlying trade with Canada and Mexico post-NAFTA -- data which shows that someone benefited from the agreements as well.  To that end, consider these two charts:

NAFTA was put into force at the beginning of 1994, which, coincidentally, is when the two charts above begin.  The top panel shows total US exports to Mexico, while the bottom shows total US exports to Canada.  Between the years 1994 and 2017, total exports to Mexico increased 8 fold while those to Canada were up 3 fold.  In other words, there were also clear winners on the US side.  

     There are problems with trade -- there always are.  But there are also benefits, which have been greatly overlooked over the last few years.  

Linkfest

Lael Brainard: Rethinking Monetary Policy 
Yellen: The US Economy and Monetary Policy
James Bullard talks about inflation
Really cool drone video of a Norwegian highway (NYT)
A contentious NAFTA provision that is causing problems (NYT)
Rosengren sees inflation rising to 2% in the intermediate term (NYT)
US stocks are very expensive by historical valuation methods
Why is global wage growth so low? (IMF)
Recent and notable charts (Scott Grannis)
UK fears Brexit talks will fall apart (BB)
Austria's swing to the right is the new EU normal (NYT)
Taylor is a leading Fed candidate (BB)



Your daily dose of jazz: Pat Metheny, Are Your Going With Me

A housing teaser

 - by New Deal democrat

Here is something I have been working on for the last month.  As it happens, last week Kevin Drum posted some aspects of the same data.

House prices have exceeded by a substantial margin median household income:

But the monthly mortgage payments have not:

This is because, while the prices of houses have increased, mortgage interest rates have decreased over the same period.

So, saving for the down payment is considerably more difficult (unless, e.g., parents are helping out), but once the house is bought, the monthly carrying cost for living in the house really hasn't gone up at all.

 What's missing in this discussion is comparing both household income and mortgage payments to the alternative (leaving aside living in mom and dad's house) of paying rent.

I still have some number crunching to do, but once the three way comparison is finished, it will be a really illuminating look into how much the alternatives for shelter really cost.  Stay tuned.

Is This Why Wages Are Low?

These are two graphs from a post over at the Center for Equitable Growth. 

The top chart shows that the relationship between unemployment and wage growth isn't as strong as you'd think.  Recent research highlighted by Fed President Bullard made the same observation.  But the bottom chart -- now that's what a tight correlation looks like!

I ran a quick, down-and-dirty calculation from FRED data using simple correlation analysis, but I used the employment to population rate and the Y/Y percentage change in average hourly earnings of all employees.  Here's the scatterplot:

The correlation was .68 -- pretty high.   

Here's a chart of the prime age employment ratio:

It's still low; it only just attained levels seen at the low of the last recession, meaning this analysis could be on to something. 

A thought for Sunday: the Rule of Gerontocracy

 - by New Deal democrat

The US looks like government of, by, and for senior citizens.

President Donald Trump just had his 72nd birthday. He assumed office at age 71, the oldest person ever to do so.

In Congress, Senate Majority Leader Mitch McConnell is 75 years old.  His Democratic counterpart, Charles Schumer, is a relatively spry 66. The median age of US Senators is 63. A full 30 Senators are age 70 or older. Sixteen of them are over 75. Nine are over 80!  

The oldest, Diane Feinstein of California, is 84 years old and just announced that she intends to run for re-election. Should she win, by the end of her term, she will be 91 years old -- if she survives. The average life expectancy for an 85 year old woman is 6.9 years. In other words, she will have nearly a 50% chance of dying in office before she completes her term.

In the House of Representatives, Speaker Ryan is the baby of the group at age 47.  Democratic Minority Leader Nancy Pelosi is 77. The average House member is 57 years old, the oldest average ever. Over 30% of the Members are age 65 or older. Over 15% are over 70. Twelve Members are over 80!

The median age of Justices of the Supreme Court is 67. Two Justices are over 80.  One is 79. In the 19th Century, the average Justice served about 10 years. Now they sit on average close to 25 years.

In short, the majority of the leadership of all three branches of the US government are old enough to collect Social Security and Medicare.

Forget Boomers, most of the US leadership belongs to the Silent Generation, and formed their basic political opinions in the 1950s during the days of Ike and Senator Joseph McCarthy, and when court-ordered racial integration was just beginning.  And it shows.

In survey after survey, when it comes to social justice issues, the older the person, as a general rule the more conservative their opinions.  Here is the demographic breakdown on attitudes towards gay marriage:

And here is the breakdown as to immigration:

Since people over age 45 are the most likely to vote in midterm elections:

these are the age groups who are having their views enacted.

And when it comes to partisanship, the most reliably conservative, Republican generation has been the Silent Generation (along with the tail end of the Boomers and the early Gen X, who came of age during the stagflationary 1970s):

While, as the chart shows, the late "Greatest Generation" leaned blue, but they have almost all passed from the scene. Thus the midterm elections have been dominated by an extremely conservative electorate. They have elected people in their own age group.  And the politicians they elected are serving their interests.

This is government of, by, and for the elderly: rule by gerontocracy.

Weekly Indicators for October 9 - 13 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This week there was a significant change in one of the long leading indicators, and that is enough for me to downgrade my long term outlook from mildly positive to neutral.

They are monsters

 - by New Deal democrat

The President and his GOP majorities in Congress are monsters. As one commentator on NPR put it yesterday afternoon, the President's default mode is to toss an armed hand grenade into a room in order to create chaos.  He can then pick out the most vulnerable, and use that leverage to enter into a win-lose deal.

Meanwhile, having been emboldened by the 2011 Debt Ceiling Debacle, the Congressional GOP majorities, who haven't been able to legislate affirmatively, have become specialists in taking hostages and threatening to shoot them unless their agenda is enacted.

Trump and the GOP Congress combined have, as of this morning taken at least four hostages:

DREAMers - the DACA program is being terminated. After an initial claim that a deal had been made to protect young people who had been brought to the US as children and know of no other home, the malAdministration is now taking a hard line, refusing to protect the nearly 1 million enrollees from deportation unless it gets its entire immigration policy enacted.

SChip recipients - this program, which provides medical insurance coverage for over 8 million  lower income children, was allowed to expire on September 30.  Despite assurances from the Congressional GOP that it would be re instituted promptly, nothing has been done.

Puerto Ricans - Unlike Texas, Louisiana, and Florida, which are GOP majority states, the malAdministration never provided prompt aid to the over 3 million Puerto Ricans, and is threatening to withdraw the aid before basic services are restored.

Recipients of Obamacare subsidies - the malAdministration is refusing to make subsidy payments under the ACA to insurers who enroll those who have less than 2.5 times the income of the Federal poverty level, which includes about 7.5 million people who have enrolled under Obamacare.

That's a total of close to 19,000,000 hostages.

All four groups are not GOP constituencies.  Further, three of the four groups of hostages have in common that they aren't presently able to vote, although SChip children do grow up and Puerto Ricans can move to the mainland, and SChip children have parents and Puerto Ricans already have lots of relatives on the US mainland, all of whom can vote.

They are monsters. Real harm is being inflicted on a significant share of the US populace, out of little more than spite. People will die as a result.

Do you think those 19,000,000, or their parents, relatives, and friends, might be motivated to vote in 2018 and 2020?

-From Bonddad

These last 9 months have been incredibly disheartening.  I've watched as the toddler-in-chief (boy do I wish I coined that term) has continued to bully, threaten and in general do whatever he can to harm other people.

Today's executive action to eliminate insurance subsidies was unconscionable.  It will leave millions without health insurance.  It is a move that the entire health care complex voiced disapproval of.  Hospital stocks tanked on the market open.   

It is one of the worst policy decisions ever undertaken by a US President.

Real money supply: the slow deceleration continues

 - by New Deal democrat

I made the point a few weeks ago that the non-financial long leading indicators had turned at least neutral if not negative, while the financial ones were still positive.

But I've particularly had my eye on real money supply, especially M2.  This post is up at XE.com.

And in an update, as of this morning's consumer inflation number, Real M2 growth has fallen slightly below 3.0% YoY, which turns it from a positive to a neutral.

There Is No Commodity Based Inflation

Consider the following charts (the top three area daily; the bottom is weekly):

All prices are either declining or stable.  The only major ETF that is showing strength is the industrial metals ETF (this is a weekly chart):

This explains why non-food and energy prices are subtracting from prices:

This is one reason why overall inflation is so week globally.

Hurricane adjusted initial claims for the week of September 30: 243,000

 - by New Deal democrat

I am repeating an exercise I undertook in 2012 when Superstorm Sandy disrupted the initial claims data: estimating what the initial jobless claims would have been, but for the hurricanes.  Since this morning initial claims for the first week of October were reported at 243,000, this will probably be the last week in which this exercize is necessary.

In 2012, I created the hurricane adjustment by backing out the affected states (NY and NJ) from the non-seasonally adjusted data, which gave me the number of initial claims filed in the other 48 states.  I compared that with the same metric one year earlier, and multiplied by the seasonal adjustment to arrive at the number if the affected states had the same relative number of claims during the given week, as all of the unaffected states.

This tells us whether or not the hurricane disruptions are masking any underlying weakness in the economy.

This year I backed out Texas starting 4 weeks ago, added Florida 3 weeks ago, and Puerto Rico last week.

The state by state data is released with a one week delay.  So what follows is the analysis for the week of September 23, the number for which was reported at 272,000.

Here is the table for the Week of September 24 in 2016 vs. September 23 this year:

Metric                              2016                   2017

Seasonally adjusted:       248,000              258,000

Adjustment for total:       1.23                   1.26

Not seasonally adjusted: 200,456             204,662 

Florida claims:                 7,275                 18,902
Puerto Rico claims:         1,621                 328 (!)*
Texas claims:                   14,323               17,063               

NSA claims ex-FL,TX,PR:177,237           172,369

FL, TX, PR as % of total: 11.6%                   n/a

2017 w/ FL,TX, PR adjustment:  n/a          194,988

*Yes, Puerto Rico really was lower this year, presumably because offices were not open or claimants were otherwise unable to file.

In 2016 the weekly seasonal adjustment was 1.23. This year it was 1.26 Multiplying the non-seasonally adjusted total of 194,988 by 1.23 gives us 240,000. Multiplying by 1.26 gives us 246,000.

Thus the hurricane-adjusted initial jobless claims number for the week of September 23, 2017 is 243,000.

Here are the hurricane-adjusted numbers for previous four weeks:
Sept. 2:  239,000.
Sept. 9:  229,000.
Sept. 16: 237,000
Sept. 23: 246,000

The four week hurricane adjusted average is 239,500.

The underlying national trend in initial jobless claims has remained very positive during the period of hurricane disruptions. Unless the disruptions remain significant in next week's report, this will be my last hurricane-adjusted update. 

August JOLTS show strength in hiring, but continued slow deceleration in the labor market

 - by New Deal democrat

More and more commentators seem to be noticing that the disconnect between the "soft data" of openings in this survey and the "hard data" of actual hires is not a good thing. As I have pointed out many times, openings can be just chumming the water for resumes, or even laying the groundwork to hire foreign workers. The disconnect betrays an unwillingness to pay new hires more, or to engage in on the job training.

That disconnect continued in this week's report for August. Openings continued to run about 10% higher than actual hires:

The report does give us a very granular view of the labor market, with the major shortcoming that it has only covered one full business cycle.  To recap, in the last business cycle, hires peaked and troughed before separations: 

Further, hires stagnated, and shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

 

[Note: above graphs show quarterly data to smooth out noise]

Here are hires vs. separations on a monthly basis for the last several years:

Once again for this report, even while quits have continued to rise, involuntary separations bottomed a year ago, and have risen  on a quarterly basis ever since.  Here's the monthly view of the last several years: 

The recent surge in layoffs and discharges is actually similar in scale to that just before the last recession.

As I pointed out earlier this week, both the Establishment and Household employment surveys show a decelerating pace of job creation. The decelerating pace of hires and quits, and accelerating pace of layoffs and discharges, while still net positive, show a similar slow deterioration..

New Things are Afoot ... Soon

Hey all,

This is Bonddad.  Yes, the real bonddad (because, of course, there are thousands of people impersonating me on the web). 

I haven't really been around here for ... awhile.    That will be changing soon.  NDD and I (and some other people) have some new projects in the works that will be very cool.

Just wanted to give you a heads up, as it were.

BD

One more scene from the September jobs report: late cycle deceleration continues

 - by New Deal democrat

The rate of year over year job growth is probably the single best mid-expansion indicator, in part because there is very little noise in the Establishment survey jobs data YoY.  But, as the below graph shows, going back all the way to 1948, while it is noisier the Household survey YoY jobs data also traces out the same pattern with very few exceptions (notable the early 1950s and the mid 1960s):

Even a cursory glance at the graph shows that we are on the decelerating side of that indicator.  Here's a close-up of the last 10 years:

Although the Establishment and Household numbers moved in very different directions this month, viewed in context both show a significant downshift in 2017 from the last few years.

Yesterday I noted that if leisure and hospitality jobs had grown by their 12 month average of +27,000 in September vs. their actual -111,000, the September Establishment survey would have  grown by a relatively weak 105,000 (yes I know it is more complicated than that, but it is a good K.I.S.S. estimate). Since in September 2016 jobs grew by +249,000, even with that hurricane adjusted estimate, YoY job growth would have decelerated to 1.3%.

In the past-WW2 era, typically late-cycle deceleration was accompanied by (and generally caused by) an increase in inflation and an increase in Fed interest rates to chase after it. The few times there were multiple YoY peaks in job growth (the 1960s, 1980s, and 1990s), the Fed engineered "soft landings" where it lowered rates after initial raises.

Per Tim Duy, who has a good record of Fed-watching, even in the absence of rising inflation,  they seem bound and determined to raise rates again in December.  A December rate hike shouldn't be enough to push the economy into a later recession, but it should put further downward pressure on job growth in 2018.

Scenes from the September jobs report

 - by New Deal democrat

On Friday I highlighted the difference between the results of the establishment survey and the household survey.  A 2006 paper from the BLS (pdf) explaining the differences in how jobs are counted in the two surveys shows us why:

Interviewers from the Census Bureau contact households and ask questions regarding the labor force status of members of the household during the calendar week that includes the 12th day of the month. The broad coverage of the CPS encompasses ... workers temporarily absent from work without pay. 

.... 

[In the Establishment survey, b]usinesses report the number of persons on their payrolls who received pay during the pay period that includes the 12th day of the month. Workers who did not receive pay during the pay period are not counted.

Thus an employee at, say, Barnacle Bill's Seashore Restaurant, who wasn't paid during the week of Hurricane Irma because the restaurant was closed, doesn't get counted in the Establishment survey, but *does* get counted in the Household survey.

Thus, although the household survey is the smaller sample, and thus subject to much more noise, it probably gave us a much truer picture of the labor market for the whole of September.  While the employment gain itself (906 thousand!) was insane, and surely not accurate, the ratios of unemployment, underemployment, and participation in the survey probably picked up the true  trend of improvement.

So let's look at those.  First of all, here is the U6 underemployment rate.  I've subtracted 8.3% from the result, to better show how the present situation compares to the last two expansions:

In the last expansion, the underemployment rate newer got below 7.9%. The late 1990s was a genuine boom.

Next, here is the employment to population ratio for the prime age workforce of 25 to 54:

We are 1.3% below the peak of the last expansion.  Again, the figure for the 1990s shows what a real boom looks like. Since that demographic is about 125 million people, that 1.3% equates to a little over 1.6 million people.

So if we were to get another 1.6 million jobs over and above population growth, plus growth of about 400,000 full time jobs vs. part time jobs to convert the involuntarily part time employed, that would get us to full employment.

Finally, here's a graph of the last 12 months of leisure and hospitality employment from the Establishment survey:

In the 11 months before September, an average of 27,000 jobs were added each month. If we replace the -111,000 jobs lost last month with the +27,000 average of previous months, the Establishment survey would have shown a gain of 105,000 jobs.  Of course, this wasn't the only sector affected by the hurricanes, but that number, while still relatively weak, is probably closer to the actual trend.