Weekly Indicators for May 28 - June 1 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The long leading indicators have now crossed a threshold.

May jobs report: excellent news on unemployment, underemployment, and wages

- by New Deal democrat

HEADLINES:

• +223,000 jobs added
• U3 unemployment rate fell -0.1% from 3.9% to 3.8%
• U6 underemployment rate fell -0.2% from 7.8% to 7.6%

Here are the headlines on wages and the braoder measures of underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  up 68,000 from 5.115 million to 5.183 million   
• Part time for economic reasons: down -37,000 from 4.985 million to 4.948 million
• Employment/population ratio ages 25-54:  unchanged at 79.2%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.07 from  $22.52 to $22.59, up +2.8% YoY. This is the highest nominal YoY gain for the entire expansion.  (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.)      

Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  

• Manufacturing jobs rose 18,000 for an average of 22,000/month in the past year vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
• Coal mining jobs rose 300 for an average of 110/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

March was revised upward by 20,000. April was revised downward by -5,000, for a net change of 15,000.   

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 hours from 41.0 hours to 40.8 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by 25,000. YoY construction jobs are up 286,000.  

• temporary jobs decreased by -7800. 
 
• the number of people unemployed for 5 weeks or less decreased by -81,000 from 2,115,000 to 2,034,000.  This is a new post-recession low.

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

• Overtime declined -0.2 hours from 3.7 hours to 3.5 hours.
• Professional and business employment (generally higher-paying jobs) increased by 23,000 and  is up +206,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.2%.

•  the index of aggregate payrolls rose by 0.5%.     

Other news included:            

• the  alternate jobs number contained  in the more volatile household survey increased by  +293,000  jobs.  This represents an increase of 2,582,000 jobs YoY vs. 2,363,000 in the establishment survey.      
     
• Government jobs increased by 5,000.       

• the overall employment to population ratio for all ages 16 and up rose 0.1% to 60.4  m/m  and is up 0.4% YoY.          
• The labor force participation rate declined -0.1% to 62.7  m/m and is unchanged YoY  

SUMMARY

This was an excellent report with only a few drawbacks. Both unemployment and underemployment fell to rates not seen since the turn of the Millennium. Perhaps more significant, average hourly earnings for nonsupervisory workers increased at the highest rate since 2009. The trend over the last 6 months has been rising, and it appears that ordinary workers are finally getting a little wage traction.

Other good news included the continued decline in involuntary part-time employment, and the decline in short term unemployment to its lowest level in the expansion.

There were a few negative notes, including an increase in discouraged workers, a decline in the manufacturing workweek (which really just took back April's gain), a decline in the leading temp jobs number, and a deceleration in gains in the higher-paying business and professional category. Further, undoubtedly this report will signal to the Fed that it is OK to raise interest rates again.

This report was a continuation of the recent string of very good reports, as last autumn's big increase in consumer spending feeds through into jobs. I nevertheless expect the late cycle trend of deceleration to re-assert itself over the next few months. 

Corporate profits for Q1 2018 give caution signal

 - by New Deal democrat

Corporate profits for Q1 were repored yesterday as part of the GDP update.

They are both a long leading indicator for the economy as a whole, and they also lead the stock market, when the latter is averaged quarterly. By both measures, they are flashing caution.

This post is up at XE.com.

More evidence of increasing deflationary pressure on wages

 - by New Deal democrat

One of my pet peeves is that economics as a discipline needs to import the entirety of learning theory from psychology, not just parlor tricks like the endowment effect.  For example, learning from models.

To wit, once Jack Welch was successful in using a pay scheme at GE that ensured that a given percentage of employees would not get a raise in any given year, it was inevitable that other employers who adopt the idea until it spread throughout corporate America. And it not giving raises to a certain percentage of employees was successful, why not implement it across the board with *all* employees?

Monkey see, monkey do.

As I noted several weeks ago, even though we are at least closing in on full employment, the percentage of employers not raising wages at all has gone up in the last year:

And now, cue Atrios about how big companies, fat with their new tax cut $$$, aren't planning on raising wages at all:

[E]xecutives of big U.S. companies suggest that the days of most people getting a pay raise are over .... [In] rare, candid and bracing talk from executives atop corporate America, made at a conference Thursday at the Dallas Fed[, t]he message [wa]s that Americans should stop waiting for across-the-board pay hikes coinciding with higher corporate profit ....

....The moderator asked the panel whether there would be broad-based wage gains again. "It's just not going to happen," [Troy] Taylor, [CEO of the Coke franchise for Florida,] said. The gains would go mostly to technically-skilled employees, he said. As for a general raise? "Absolutely not in my business," he said.

This is putting even more deflationary pressure on wages. Since the refinancing spigot has been turned off due to the end of the secular decline in interest rates, if wages don't increase, exactly where do employers think increased demand is going to come from? Further, if companies freeze wages even during good times, what is going to happen when, inevitably, times turn bad?

Here again are two graphs I have run a number of times already, showing that the YoY% decline in wage growth averages over -2% during recessions:

Currently wage growth for nonsupervisory workers is running at 2.6% YoY. Wage freezes are likely to be endemic in the next recession, and even worse, outright wage cuts, potentially leading to a deflationary wage-price spiral, are a significant possibility for the first time in over 80 years.

Memorial Day 2018

  - by New Deal democrat

For all those, of whatever race, creed, color, or nationality, who gave their lives so that government of the People, by the People, and for the People shall not perish from the Earth:

Gettysburg National Cemetery

Antietam National Cemetery

Arlington National Cemetery

May they rest in peace.

Weekly Indicators for May 21 - 25 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The primary movers -- in differing directions -- were interest rates, manufacturing, oil prices, and several housing-related metrics.

$3 a gallon gas has returned!

 - by New Deal democrat

According to GasBuddy, as of this morning the average price of gas in the US is $3 a gallon:

This is the highest in 3 1/2 years.  YoY gas prices are up a little over 25%.

I suspect that this is a significant psychological threshold. While it's not a "shock," which historically has caused Americans to cut back their spending by double the increased amount that they spend on gas, causing a recession, it might very well cause a 1:1 retrenchment, which will be felt by discretionary spending like restaurants.  And, of course, it recirculates more of the currency outside of the USA into the treasuries of petroscheikhdoms.

An interesting byproduct is that the regional Fed districts which suffered the most from the downturn several years ago are turning in the best manufacturing and new orders growth in any of the districts now. 

Housing market shows no sign of stalling out yet

 - by New Deal democrat

Now that all of the major reports are in, I take an extended look at the state of the housing sector.

This post is up over at XE.com.

The two most positive measures for housing remain undaunted

 - by New Deal democrat

We won't have a more complete picture of the housing market this month until tomorrow's release of existing home sales, but although they are about 90% of the total market, they are the least important economically.

What we can say is that, so far, the recent increase in mortgage rates has not dented the momentum of the new home market, at least as far as the two most positive measures -- purchase mortgage applications and new home sales -- are concerned.

First of all, although refi is dead -- it just made a new 17 year low -- purchase mortgage applications made a new expansion high in the last month. Although their rate of increase has decelerated in the past year, as shown on the graph below (h/t Calculated Risk) (sorry for the blurry quality, but I wanted to zoom in on the recent few years):

the fact remains that for all of a few weeks, this year they remain solidly positive YoY.

Second, although they declined m/m, new single family home sales have also maintained a steadfastly positive trend. The below graph compares houses sold (blue) with houses for sale (red, x2 for scale):

There is no hint of a change in direction here.

Median sales prices for new homes did plummet this month:

but this is a very noisy and heavily revised metric, and I wouldn't be surprised in the slightest to see this downturn revised away one month from now. In addition to which, prices typically follow sales, so I would not expect prices to turn down meaningfully until after sales do.

To sum up: these two have been the most optimistic ones for the entire housing market, and they remain so.

Dear Professor Krugman, Say Its Name!!! "Taboo"

 - by New Deal democrat

Paul Krugman is coming closer to embracing my "taboo" argument.

A month ago I wrote that raising wages was becoming a taboo. I considered three alternative hypotheses:

1. monopsony (quoting Vox)

[I]n recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages.....{Monopsonistic f]irms [which pay less than "competitive" wages] bear the loss in workers (and resulting lowered sales)  in exchange for the higher profits made off the workers who do not quit. 

2. skittishness about the longer term economy

Since 2000 there have only been about 4 years at most (2005-07 and 2017) where the economy has seemed to be operating at close to full throttle.  If I [an employer] raise wages now, I will attract more workers, but then when the good times end, I will be stuck with a higher paid workforce than my competitors who haven't raised wages. If I think that "bad times" are likely to exist more often than "good times" in the foreseeable future, then I might hold back on increasing my labor costs during the good times ...

3. taboo

[A]n economic taboo [is a] decision to leave profits on the table because they conflict with an even higher priority held by the employer .... [If] I am an employer who *does* believe that the good times are likely to last, BUT I also believe that people who come to work for me ought to be grateful to earn, say $10 per hour, and because of my firm ideological belief, I am not going to budge. If ... my ideological belief is shared on a widespread basis by my competitors and other businesses, I am *not* at a competitive disadvantage. Thus depressed wages may persist because raising wages has become a taboo,  

Using the JOLTS data, I concluded based on the persistently excessive level of job openings vs. actual hires, together with the near record number of quits, that hypothesis number 3, "taboo," best fit the evidence.

Again, to briefly summarize: if skittishness about the durability of a strong economy were the primary driver of lower wages, I would not expect those employers to even go looking for new employees to hire at higher wages. In other words, there wouldn't be an elevated number of job openings vs. actual hires. Further if it were monopsony, we shouldn't see the near record number of employees quitting their jobs to take other, higher-paying jobs. Also, we wouldn't see the mismatch between hires and openings among small employers without monopsony power -- but we do. So "taboo" is the best hypothesis.

Subsequently, I also pointed out that the rising wage growth for job-switchers, vs. actual *declines* in wage growth for job-stayers, as described by the Atlanta Fed, also supported the idea that raising wages was becoming a "taboo."

A couple of weeks ago, Krugman looked at the issue preliminarily, and tentatively plumped for the "skittishness" argument:

OK, here's my theory about ... wages. What employers learned during the long slump is that you can't cut wages even when people are desperate for jobs; they also learned that extended periods in which you would cut wages if you could are a lot more likely than they used to believe. This makes them reluctant to grant wage increases even in good times, because they know they'll be stuck with those wages if the economy turns bad again.

Sunday he took another whack at it, and he appears to be moving off the "skittishness" argument towards the "taboo" argument, even citing the same high number of quits in the JOLTS report that I did: 

One [reason for stagnant wages] is simply that it has been a long time since labor markets were tight. Most  HR managers, I would guess, don’t remember what a full employment economy is like. They find the idea that there aren’t tons of highly qualified workers lined up for every job opening shocking – and,  inevitably, blame the workers. 

More speculatively, I’ve suggested that employers are especially unwilling to raise wages because they remember the Great Recession, and don’t want to lock in higher wage costs. 

Either way, I’d argue that the combination of downward nominal wage rigidity and monopsony power helps explain both why wages didn’t fall during the period of high unemployment and why employers aren’t doing much to raise wages despite tight labor markets now."

Krugman's first alternative is pretty close to what I've been saying:

learned behavior - check

no longer rewarded - check

resulting caterwauling and foot-stomping - check

What Krugman hasn't fully embraced yet is that the same behavior by employers has persisted for several years, as shown by the spike in job openings vs. stagnant actual hires in the JOLTS data over the last 24 months. By now the HR managers Krugman describes ought to be over their shock and busily raising wages, or training new hires to impart the necessary skills. By and large, they're not. That, Professor Krugman, means it's a taboo.

And by the way, Professor, when you get around to crediting the inspiration for your insight:

[cueing 007 music] 

The name is democrat. 

New Deal democrat.

Real retail sales update for April 2018

 - by New Deal democrat

It's a slow start of the week, so let's catch up on one of my favorite indicators, real retail sales, which were reported last week.

First of all, adjusted for population, real retail sales have peaked a year or more in advance of each of the last two recessions.  That hasn't happened yet, as the long term rising trend is intact, even if sales have backed off their wintertime highs

If they go longer than 6 months without making a new high, then it would be a signal for caution. But we're not there yet.

Also, in the short term consumption leads hiring, so let's update that comparison (these are YoY% changes):

This suggests that there should not be any significant weakness in the job market in the next few months.

Finally, since I've recently noted that the YoY change in the Fed funds rate has a good track record of forecasting the YoY% change in jobs 12-24 months out, let's add that (green) into the mix:

I don't think we'll see a significant downturn in jobs until real retail sales growth decelerates to about half its current YoY rate.

Weekly Indicators for May 14 - 18 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The very last thing I do, only after I tabulate all the data, is to decide on the title.  This week it is "The long term forecast deteriorates further."

The percentage of employees who don't get wage raises; is the Taboo undergoing an "extinction burst"?

 - by New Deal democrat

I came across the below graph yesterday from the Kansas City Fed. It's pretty shocking:

It represents "wage rigidity." In english, that means the percentage of employees who don't get any annual wage increases.

It speaks for itself. Nine years into the economic expansion, with an unemployment rate under 4%, and un underemployment rate of 7.8% (only 1% above its all time low), more workers still aren't getting any raises than at any time during the 2001 recession or at any time during the expansion thereafter.

And it isn't simply slack in the labor force.  Here's the employment-population ratio for prime age workers:

This is only 2.7% below its all time peak in 2000, and equivalent to where it was in 2005. But in 2005, about 12.5% of workers weren't getting annual raises. Even now the rate is about 14.5% -- and rising over the past year.

This is the Taboo against raising wages in action. This is, in psychological terms, a learned behavior.

Even after the advent of "behavioral economics," the failure of economists to employ explanations of macro level behavior based on the concepts of learning and unlearning remains one of economics' glaring blind spots.

To refresh, a behavior that is rewarded will be learned over time, and repeated over and over thereafter, even if the rewards become sporadic. And it will even continue for awhile after the rewards are no longer there at all. Not infrequently, before the behavior is given up on, there will be an "extinction burst."

What is an "extinction burst"? It is the type of wailing, frustrated, foot-stomping, angry outburst that is characteristic of toddler temper tantrums.  If you ever watched the show "Supernanny," you've seen it: 

The caterwauling of employers that they simply can't find qualified candidates (unspoken: for the wages they want to pay them) has all of the earmarks of just such a temper tantrum.

For all but a few years in the last 15, many employers became accustomed to having multiple applicants for any job they offered, who had already learned the skills (and presumably been "downsized" or laid off by a previous employer). To put it simply: this was Marx's "reserve army of the unemployed." Employers were rewarded even if they did not offer any raises. They became accustomed to the success of this practice. In other words, they *learned* the behavior.

Now the behavior is no longer being rewarded. At the wages previously offered, candidates already skilled at the position are no longer available or applying. Instead, the "quits" rate of employees leaving their jobs for other, better-paying jobs, is near an all-time high.

So what does psychology tell us to expect? An extinction burst.

And that may be just what we are seeing in the soaring number of "job openings" compared with actual hires. Employers who don't want to raise wages are furiously repeating their learned behavior, trying one last time to make it work. 

Interest rate and gas price watch

 - by New Deal democrat

For nearly a decade, this "little expansion that could" has dodged a lot of bullets. But I suspect that the recent trend of rising interest rates and gas prices - if they continue - may finally be the cause of its ultimate demise (not now, but maybe in 18 or 24 months).  

Initial points to watch are 5% on mortgage rates and $3/gallon on gas prices.

So let's take a look. First, here are mortgage rates through yesterday (from Mortgage News Daily):

In 2016, these were as low as about 3.4%. Even after the US Presidential election, last year they hovered at about 4%. As of yesterday, they were 4.78%. Compared with mid-2016, about $375/month has been added on to the monthly payment for a new $300,000 mortgage.

Still, we're not quite at the 5% level yet (to reiterate: my best guess is that it will take 5.25% rates for at least 6 months to overcome the demographic tailwind in the housing market).

Next, here are gas prices through yesterday (from GasBuddy):

These have risen to $2.92/gallon. I suspect we will see $3/gallon shortly.

I've seen commentary that it will probably take $5/gallon for consumers to cut back on spending generally. This comes generally from the work done by Prof. James Hamilton in which he posits that consumers aren't "shocked" by a mere return to formerly high price levels. But I suspect that, as time goes on, consumers get more and more used to lower prices, so it might not take that much.

As an example, I give you the 1980s. Gas prices had risen from $.40/gallon to $.80/gallon in the 1974 Arab embargo, and then to roughly $1.35/gallon in the second shock in 80. In the early 1980s, they hovered near that mark before falling abruptly at mid-decade. They started rising again by 1989, and spiked to about $1.35/gallon during Saddam Hussein's invasion of Kuwait (red line below):

YoY real GDP started to fade in 1989, and rolled over in 1991 coincident with that invasion.

While it's noisy, when we compare real retail sales with gas prices, generally we see a 1:1 substitution in consumer spending into 1989, and then that fades as well until the shock in 1990:

In 1990, gas prices were less than 10% above their 1980 peak by this measure. In other measures, they didn't even quite reach that peak. In today's terms that would mean about $4.50 (compared with 2008's $4.23).

At $3/gallon, we will reach a point comparable with 1989. So my suspicion is that consumers will simply re-allocate spending from luxuries like entertainment at first. That will still cause $$$ to flow out of the US to petrosheikhdoms. If we get above $4/gallon towards, $4.50, that will probably be enough for consumer retrenchment.

Mind you, I'm not saying that we *will* reach these interest rate and gas price levels. But it's time to start watching.

And now, time for a little shameless self-congratulation

 - by New Deal democrat

The Intelligent Economist has come out with its list of the Top 100 Economics Blogs for 2018:

The 2018 list highlights many newcomers and covers a wide range of economic topics. Blogs are included in categories ranging from general economics to specific topics such as finance, healthcare economics, and environmental economics. There are microeconomic blogs, macroeconomic blogs, and blogs which focus on specific geographic regions.. . . .   Candidates were chosen based on quality, not popularity or mainstream appeal.

And there on the list, along with all the traditional Big Boyz (and Angry Bear, where most of my stuff is cross-published), you will find this:

So, thank you to the Intelligent Economist, and you, Dear Reader, should consider yourself part of a small but elite group.  :-)

April housing tantalizingly ambiguous; industrial production whipsawed but positive

 - by New Deal democrat

This morning April housing permits and starts, as well as industrial production, were released.

The housing data was tantalizingly capable of several interpretations.  Below are the single family permits, which I favor because they are the least volatile measure, and multi-unit permits:

Not shown, for this expansion the number of total permits issued was lower than only  January and March.

The first takeaway is that the increasing trend in single family permits since 2011 is intact. Hurray!

The second takeaway is that in the last two months, single family permits have declined from their recent high, while multi-unit permits have increased. This *may* mean that increased interest rates have finally bitten enough that some prospective buyers are being forced to back off from buying a single family home, and either buying a condo or renting an apartment instead. This "substitution effect" has happened late on earlier housing cycles, so it is possible it is starting to happen now. If that is true, then we should regard the big surge in permits during the winter as a "buyer's panic," where, fearful of even higher rates in the near future, potential buyers locked in *relatively* lower rates earlier. Time will tell. Like I said, tantalizingly ambiguous.

Here's a look at the more volatile housing starts, both monthly (blue), and quarterly through March (red):

The three month moving average of starts, which I use to cut down on the noise, backed off only slightly from its expansion high one month ago.  Since (not shown) there remain an increased number of units that have been permitted but not started, I expect this metric to continue to increase for at least a few more months.
___________

Industrial production, meanwhile, whipsawed.  There was a big increase in April, but almost as big a downward revision for March. The net result is that production only rose +0.1% from the previous estimate for March. Regardless, the last two months together show a rise of over 1% from February:

So the positive trend in this king of coincident economic indicators is intact.

R.I.P. bond bull market, 1981-2016

 - by New Deal democrat

On September 30, 1981, the 10 year US Treasury bond yielded 15.84%. It has not been that high since.  On July 8, 2016, it fetched only 1.37%.  It is unlikely to see that low rate again for a very, very long time.  Those two dates likely mark the birth and death dates for perhaps the biggest bond bull market in history.

Here (from CNBC) is the relevant graph:

Today the 10 year closed at 3.067%, having hit an intraday high of 3.09%.  In the 1990s it twice made 3 year highs.  In 2006 it made a 4 year high. By contrast, the last time it was as high as it closed at today was 7 years ago in 2011.

The immediate cause of death for the bond bull market was likely the ill-conceived multi-$Trillion GOP tax giveaway to the wealthy enacted in December, in the midst of an economy operating near full capacity.

Perhaps of more immediate importance, CNBC also reported  (via Mortgage News Daily) that 30 year mortgage rates had risen to 4.875% today. That is also a 7 year high. Mortgage rates had been as low as 3.30% in 2013 and 2016.

A few months ago I estimated that it would take a minimum of a Treasury yield of 3.25% and a mortgage rate of 5%, for at least 6 months, to overcome the demographic tailwind underpinning the housing market.  We are now close to both of those rates. And refinancing debt at lower rates, which did so much to help keep the middle and working classes afloat during the last 30+ years, is now dead.

In the longer term, I believe we have now entered an interest rate period similar to the late 1950s-1980, where each economic expansion saw higher and higher interest rates. 

Meanwhile, the time to rebuild our worn-out infrastructure at ultra-low interest rates has been completely wasted. I can see the future, and it makes me sick to my stomach.

On the Cusp

 - by New Deal democrat

About half of all of the long leading indicators are, if their current trajectories continue, on the cusp of turning negative by next winter sometime.

This post is up at XE.com.

Real wage growth adjusted for gas prices

 - by New Deal democrat

One of the things I note from time to time in my discussions of wage growth is how much its fluctuation in real terms has been affected by gas prices. For example, in the middle of the worst recession in nearly 70 years, real wages actually went up! Why? Because gas prices fell from $4.25/gallon to $1.50/gallon in just a few months.

So, what would a long term view of real wages look like if I took out the whipsawing effect of gas prices? 

In the 25 years from 1970 to 1995, what you mainly find is that the huge increase in the new supply of potential workers (women) acted to depress wages, so the below graphs start in 1995. In the first, I've normed the level of both real wages in total (red) and real wages ex-gas prices (energy) (blue) to 100:

You can see how much the secular rise in gas prices from $0.80/gallon in 1998 to $4.25/gallon in 2008 depressed real wage growth; and similarly how the collapse from nearly $4/gallon to $1.70/gallon in 2014-16 helped it.

More importantly, notice that real wages adjusting for gas prices rose at a fairly steady clip from 1995 through 2010.  Since then, the increase has been quite slight.

Looking at the same data as YoY% changes is helpful in seeing the change in trend:

With some exceptions, real wages rose about 1.5% a year on average between 1995 and 2010. But since then, they have averaged no better than about half of that, +0.7% a year.

During the entire last 7 year period, real wages leaving aside gas prices have only gone up about +1.4%.

Further, so far it doesn't appear to be a matter of a labor market that isn't tight. In the below graph I have overlaid the U6 broad underemployment rate onto real wage growth adjusted for gas prices. 

In both the late 1990s and the beginning of 2005, when real wage growth started to accelerate, U6 was roughly at 9.3%. We arrived at that benchmark in November 2016, without any noticeable acceleration in wage growth in the 18 months since.

Weekly Indicators for May 7 - 11 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com. The general situation with regard to interest rates continues to deteriorate ever so slightly towards being negative.