Weekly Indicators for June 26 - 30 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

The yield curve abruptly steepened, but on the other hand, real money supply decelerated further.

Brexit, one year later: "a fire across the river"

 - by New Deal democrat

I take a one year retrospectivie look at Brexit, and its (lack of) effect on the US economy, over at XE.com.

Five graphs for 2017: mid year update

 - by New Deal democrat

At the beginning of the year, I identified 5 trends that bore particular watching, primarily as potentially setting the stage for a recession next year.  Now that we are halfway through the year, let's take another look at each of them.

#5 Gas Prices

One potential pressure point on the economy was gas prices, which appear to have made a long- bottom in January of 2016. As they began to rise, consumer inflation has increased from non-existent to almost 3%. So the issue was, will they rise even further and drive inflation even higher?

And the answer so far this yeear has been a resounding "No!"  Typically it has taken a 40% YoY increase in gas prices to shock the consumer.  Gas price increases did briefly approach that point early in the year, but since then they have retreated all the way to being negative YoY:

This has actually helped boost real wages, as we will see further below.

#4 The US$

Another potential pressure point on the economy was a big increase in the relative value of the US$, which was part of the shallow industrial recession of 2015.  The $ started to rise again after the November election.  Here too after an initial spike, the data has calmed down again:

#3 Residential construction spending vs. mortgage rates 

Another data point which rose sharply after the November election was interest rates.  Generally speaking, home building changes in the opposite direction of interest rates.  So would the increase in interest rates (e.g., mortgages) cause new residential construction to back off?

Although as I have written in the past several weeks, the slowdown has appeared in permits and housing starts -- and new home sales have turned flat in the last few months, the slowdown hasn't yet filtered through into actual residential construction spending:

Residential contruction spending is a very smooth, un-noisy series, but it does lag permits and starts by a few months,. Note that typically it has taken a big change in mortgage rates about 9 to 12 months to feed through into residential contructioni spending. It hasn't yet this year.

#2 The Fed Funds rate vs. consumer inflation

If consumer inflation rose past the magic 2% Fed target, would the Fed chase it?  The Fed's preferrred measure is personal consumption expenditures, but consumer inflation YoY as of March was up +2.8%, but due to gas prices as discussed above, inflation is now back down under 2%.  Nevertheless the Fed has hiked interest  rates twice:

The yield curve has begun to compress, but it is still positive. Still, it will be difficult to avoid an inversion in interest rates should the Fed stay on its current course with several more hikes.

#1 Real retail sales vs. real average hourly earnings

The final graph comes from my "alternate" recession forecasting model which turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). The long term relationship has been that sales lead jobs, and jobs lead nominal wage increases, but real sales vs. wages are somewhat more nuanced. In the inflationary era, through the early 1990s, YoY wareal wage growth actually slightly led sales. In the deflationary era that dates from the alter 1990s, if anything the two are a mirror image, but in every case but 2001 (where real wage growth just decelerated rather than declined), both have been negative going into recessions:

 Focusing on the last 20 years marking the deflationaary era, at present real retail sales continue to be positive, and with gas prices and overall inflation down, real YoY wages have turned positive again:

I would expect to see both sales and wages stall out before the onset of the next recession.  Neither is presently the case.

This  has been "the little expansion that could."  In its 8 year history, it has dodged all kinds of problems without being derailed.  Like so much before them, the problems from the end of last year have been fading away. Only the problem of the Fed raising rates looks like a serious near-term issue.  

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Weekly Indicators for June 20 - 24 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is Up at XE.com.  No major changes from last week.

New Home Sales stall, but no downturn

 - by New Deal democrat

Well, the May new home sales report is out.  The good news is, it did not confirm last week's negative reports in housing permits and starts.

This post is up at XE.com.

The post-hike flattening yield curve

 - by New Deal democrat

An inversion of the yield curve has always signaled at very least a steep slowdown, and usually an oncoming recession. With the Fed hiking short term rates, where do we cut and now?

Below are two graphs, using the Dynamic yield curve tool from Stockcharts.com. In both cases the dark red line is the yield curve as of several days ago (post-hike). The light red line is the previous yield curve from the beginning of this year (first graph) and from last month (second graph):

Note that the curve is pivoting around a point between the 2 and 5 year yields, at about 1.5%. 

At this point, the yield curve is still positive, but if the trend continues, another two rate hikes should be enough to invert at least part of the curve.

Existing home sales: positive, but contain your enthusiasm

 - by New Deal democrat

It's a slow economic news week, but while we are waiting for new home sales Friday, we did get existing home sales today.

It was a good report. Not only was there an increase month over month, but it was the 3rd highest number for this entire expansion:

Even better, the three month moving average made a new high for this expansion.

But contain you enthusiasm, because even though existing home sales are about 90% of the market, they are the least economically important (because of all the activity that goes into building a new house).

The bad news is that prices made a new all time high, and inventory remains very constrained.

Absent housing, consumer inflation is running at only a little over 1%. The Fed raising rates is not going to bring on new inventory, and only make the inventory that does exist more expensive for mortgage borrowers.

So now we wait for Friday.

A further look at the housing slowdown

 - by New Deal democrat

As promised, I have a further look at last week's poor housing permits and starts numbers, and especially in the context of interest rates.

This is up at XE.com.

May industrial production: no change in trend

 - by New Deal democrat

This was a post I meant to put up Friday, but was pre-empted by the important housing news.

May industrial production came in unchanged. But that didn't stop Doomers, who had been silent about April's big increase in manufacturing, from trumpeting its 0.4% decline (go ahead, just try to find their acknowledgement of April's good number. You won't.).

So, let's put industrial production in perspective. First, here is the overall stat:

The uptrend since a year ago is still intact.

Next, let's break it down by manufacturing (blue) and mining (red):

The uptrend in each of these since a year ago also still looks intact.

Here is a bar graph of the m/m change in manufacturing:

The 0.4% decline is well within the range of normal monthly volatility.

So there's nothing in the May report which causes me to think that any economic downturn is imminent.

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A thought for Sunday: "Time goes by, so slowly . . . "

 - by New Deal democrat

It's Sunday, so I take a break from nerdy econ analysis and speak my mind.

Last November 9 we woke up to a living nightmare. The next four years were bound to be awful. The only question was, how awful?

The very tiny silver lining as of now is that, so far, it has been about as limited an awful as it could reasonably be.

The simple fact is, those things that the Executive could worsen all on his own, he is doing so.  But those things that require Legislative action or Judicial approval have either not materialized or have been stopped in their tracks.

The Executive has almost unlimited freedom of action in foreign policy, so it was a foregone conclusion that China and Russia were going to seize the opportunity to expand their power and influence, and they are doing so. Taiwan is already suffering diplomatically, and it isn't a good time to be one of the Baltic States either. The EU is looking aghast at Trump's view of NATO, and will probably vivify their moribund "European Defense Force" at least until 2021.

It is also pretty clear that Trump means to erase Obama from the history books, if for no other reason than Obama humiliated him at the 2011 White House correspondents dinner. So every Executive Order or program undertaken by Obama is being systematically obliterated. This includes deferral of action against illegal immigrants/undocumented workers. There's not much that can be done there, but even so, the Courts have occasionally stepped in, and Trump himself seems to want to allow the Dreamers to stay.

It was also always going to be a bad time to be a Muslim in the US, but even there, the Judiciary has stepped in, stopping Trump's travel ban.

And where Trump needs Legislative action, with the exception of the appointment of Gorsuch to the Supreme Court, so far there has been a big fat goose egg. I figured that Congress would repeal Obamacare in toto by January 31, and get around to the "replace" part approximately never.  Instead, due to Trump's own insistence on a replacement, as of now there is no repeal at all (the House bill is, right now, only a bill).

There's no tax cut for billionaires. There's no raiding of the SS and Medicare trust funds. The privatization infrastructure scam hasn't even gotten a hearing in Congress. And on and on.

Bottom line: there has been no legislation of significance out of the Trump/GOP Congress whatsoever. None. Zilch. Nada.

And we are over 30% of the way from the last Congressional elections in November 2016 to the next ones in November 2018. If they can manage this same record just twice more, we are almost home (maybe).

We are also 10% through Trump's four year term. In four weeks we'll be 1/8 of the way through.

As the lyrics of "Unchained Melody" say, "Time goes by, so slowly..." but time is passing and there will be an end.  In the meantime, so far things are as "least awful" as we could reasonably have hoped.

Weekly Indicators for June 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com

This week, while the high frequency data remained fairly steady, the Fed and the monthly housing data overshadowed it.

This is a Big Deal: housing permits and starts now a long leading negative

 - by New Deal democrat

I'll have more to say next week, but let me just drop this right now: this morning's housing report was a Big Deal. FRED doesn't have the graphs yet, but here are the numbers from the Census Bureau cite.

Graph of starts and permits:

Note both have turned down significantly this year.

Table of housing starts:

The three month rolling average of starts, which smooths out the volatility, is at a 12 month low. the three month rolling average of single family starts is at a six month low.

Table of housing permits:

The much more stable single family permits is at the median value for the last 12 months. Total permits are at a 12 month low.

In the past it has taken a decline of -175,000+ in permits to be consistent with the onset of recession. Today was -132,000 under January's high.

I have been expecting a slowdown, based on the jump in interest rates since the Presidential election last November. It has clearly arrived, and it is significant enough to tip my rating of the housing market as a long leading indicator all the way to negative, pending next week's report on single family home sales, which becomes all the more important.

Consumer inflation ebbs, real wages make new expansion high

 - by New Deal democrat

Yesterday I wrote about the retail sales report, and noted that the consumer price report was just as important.

To wit, both recent sources of an uptick in inflation have moderated.  First of all, shelter, which is nearly 40% of the index, and which had been running at almost 0.3% per month in 2016, has decelerated to only a little over 0.2% monthly this year so far:

Meanwhile, energy prices, which had also been rebounding, have also gone back to negative YoY, with downdrafts in 3 of the last 4 months:

The next effect of both of these decelerations has been that headline CPI (red), CPI less shelter (blue) and CPI for energy (green - divided by 5 for scaling purposes), have all sharply decelerated YoY in the last several months:

As a result, headline CPI is only up +1.9% YoY as of May.

The downdraft in consumer inflation means that real wages have resumed growing on a YoY basis:

Moreover real wages have just made another new high for this expansion:

which also means, although not shown, a new nearly 40-year high.

At least some of the slowdown in consumer spending evident in yesterday's retail sales report was probably due to the decline in real wages recently - which is now, obviously, over. That's another reason I am not terribly concerned about yesterday's retail sales report.

Finally, the slight *de*flation in May means that real median household income, which was less than 0.1% under its all time record as of April, as shown in this graph (h/t Doug Short) of Sentier's monthly calculation:

probably finally broke through and established a new all-time record high last month.

The Fed is Missing the Inflation Picture

This is over at XE.com

Retail sales disappoint -- but don't hyperventilate about it

 - by New Deal democrat

There certainly is a  lot of information to unpack from this morning's retail sales and inflation reports, and what they mean for wages and jobs.  I'll address them in separate posts.

First, retail sales.  They certainly were a disappointment, coming in at -0.3% nominally and -0.2% in real terms.  That being said, the monthly reports are somewhat noisy.   We commonly get several of these a year, as shown in this graph of the monthly change in real retail sales for the last 7 years:

There have been 9 worse monthly reports than this just over the last 3 years!

The YoY% change in real retail sales barely budged, and remains higher than for most of 2016:

So while yes it is disappointing, there's no reason to hyperventilate.

While on a monthly basis there is way too much volatility, over the longer YoY measure, real retail sales do generally lead jobs by 3-6 months (averaged quarterly to reduce noise):

Since YoY real retail sales in 2017 have been generally better than 2016, there is no reason to think that the jobs situation is going to deteriorate substantially in the next few months.

Waiting for the Fed - what happens to bond yields?

 - by New Deal democrat

Everyone expects the Fed to hike interest rates tomorrow.  I take a look at what that might mean for the yield curve over at XE.com.

Gas prices join oil prices as YoY negative

 - by New Deal democrat

Well, this isn't something I expected to happen at the beginning of this year. For the last 16 months, gas and oil prices have risen off their bottom and the question had been, how much of a YoY increase there would be.

That has all changed in the last month.  A few weeks ago, oil prices went negative YoY.

As of this past weekend, according to GasBuddy, so did gas prices:

Further, since oil prices remain down YoY:

and gas prices at the pump tend to follow oil prices with a slight lag, it looks like consumers will benefit from cheaper gas for a little while longer.  This will tend to be reflected in subdued inflation readings, and so higher real wage gains.

All of which makes it perfectly obvious that the Fed isn't raising rates to fight inflation.

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