Saturday, January 2, 2016

Weekly Indicators for December 28 - January 1 at

 - by New Deal democrat

My Weekly Indicators piece for the final week of 2015 is up at .

Too soon to ttell, but we may be getting near an important turning point.

Thursday, December 31, 2015

Grading my 2015 forecast: a hit and a miss

 - by New Deal democrat

Here are the bottom line paragraphs from my 2015 forecast one year ago:
This [the Index of Leading Indicators] is pretty straightforwardly showing good growth in the first part of 2015.  Prof. Moore's list of Short Leading Indicators (some of which are the same as the Conference Board's, and which also look forward about 4 to 8 months out, signals the same..... 
... [I]n 2014, a deceleration in housing's contribution to GDP was offset by an increase in governments' contributions at all levels.  Neither Federal nor state and local spending has returned to their pre-recession rates of growth, and at the state and local levels, it is likely there will be further improvement.  Possibly Washington can manage to avoid more own-goals.  If so, those are pluses for growth in 2015, which should continue to offset the impact on the broader economy of the housing slowdown of 2014. 
In summary, when looking at the long leading indicators, all of them are moving in the right direction.  [With a few caveats,] .... it is a safe bet that growth - including jobs and wages - will continue throughout 2015.  Depending on what happens with governments' contributions (as set forth just above), my expectation is for YoY growth in 2015 to be approximately equal to its 2014 levels.  If gas prices remain low, and housing picks up soon enough due to lower interest rates, then this may be the best year of the expansion yet.
I am scoring this as one hit and one miss.

We did manage to escape any negative quarters of GDP:

So far the Atlanta Fed's "GDPNow" estimator is calling for weak but positive growth in Q4 as well.

So I was correct to forecast continued growth this year in both the 6 and 12 month frames.  And jobs and real wages did continue to grow YoY as well:

That's the hit.

But the YoY% change in GDP has declined this year compared with 2014:

Even though housing did pick up as I forecast, and even though government expenditures stopped being a drag, the super-strong US$ clobbered the globally exposed portion of the economy, and just about all of my mid-cycle indicators have peaked and started to decline.  That's the miss.

I always try to learn from my misses, and in this case that has caused me to integrate the US$ into my system as a short leading indicator.

In the next couple of weeks, I will issue my fearless forecast for 2016.  In the meantime, Happy New Year!

Wednesday, December 30, 2015

The 2015 housing market: a final wrap up and a look ahead

 - by New Deal democrat

I have my final post of the year up at, taking a look at how housing sales, prices, and inventory have changed this year, with a preliminary forecast for next year.

Tuesday, December 29, 2015

Do the Underpants Recession Gnomes have a case after all?

 - by New Deal democrat

A couple of months ago, I lampooned what I called the "Underpants Gnomes theory of importing recession," which went like this:

1.  China is undergoing a slowdown
2.  This has spread to China's suppliers, who are undergoing worse downturns.
3.  ??????
4.  This will bring about a U.S. recession 

I concluded that "Until someone comes up with a credible scenario for Step 3, all we have is the Doomer version of the Underpants Gnomes."  Since that time, however, there has been another deflationary pulse in commodities, and another run to new highs (since cooled off a little bit) in the US$.  In short, a renewed surge in the US$ is doing a pretty good imitation of whatever would need to fill in line #3. 

That has caused me to put some further thought into the matter, and to consider modifying my position. The starting point is that, generally speaking, as China in particular becomes an ever larger factor in the global economy, the US feels more of the global effects, in a way it has not done in the last century.  These will presumably become ever more important over time.  It seems natural that the identities and strengths of the various long and short leading indicators should gradually change as well.

With that in mind, let me next make two analogies.

First, the graphic analogy for the global slowdown is this graph from 3 years ago by ECRI:

In this graph, China occupies the middle line, because that is the epicenter of the commodity collapse.  China's "upstream" natural resource suppliers are the bottom line -- they get hit even harder.  The US is the top line, the "downstream" consumer.  While US exports suffer, the US gets cheaper consumer goods in return, more than offsetting the effects of the downturn. While there is a drag on the US economy, the line still points up, albeit at a subdued level.

Second, let's analogize to the Titanic.  The ship had watertight compartments sealed at the bottom, but not the top. She sank because the water overtipped one compartment at a time.  Had the ship's compartments been sealed at the top instead of the bottom, the Titanic would not have sunk.  But its bow would have been very low in the water.  So while it presumably could have limped into New York harbor, it would not have been a good idea to try to do so through a Nor'easter!

The new global deflationary pulse that began in October has caused the slope of all three lines in the ECRI graph to point lower than otherwise - even though the US's line is still positive.  This is  the equivalent to the US economy of causing it to sit lower in the water.  Domestic problems it could otherwise withstand might be enough to cause it to sink.

Let's quantify that a little bit.  Suppose 80% of the US economy is domestic, and 20% is directly exposed to global forces. If the domestic economy is growing 2%, and the globally exposed economy is declining 5%, the overall economy still grows: (.8 x 2%) + (.2 x -5%) = +0.6%.

But suppose the intensity of the globally exposed economy's downturn doubles.  Now we have (.8 x 2%) + (.2 X -10%) = -0.4%.  The overall economy contracts.  

As I wrote last week, the effects of the global slowdown have not entered the US economy through the traditional long leading indicators, but rather directly via coincident indicators like production of steel, and rail, truck, and shipping transport, and generally into sectors of industrial production.  The big harbinger was the surge in the trade weighted US$ in late 2014:

This makes me think that the leading sectors of the US economy, in particular housing and cars, may not have to decline for as long a time, or as much as normal, for such declines to signal an oncoming recession.  In this regard the 2001 recession, which was led by business and did not affect consumer spending very much, is a decent working template:

Housing permits only fell 175,000 at their worst, and vehicle sales declined 2.4 million on an annualized basis. Industrial production declined -2.3% before the onset of the 2001 recession; it is only down -1.3% from their peak now.

It's worth emphasizing, however, that every other long leading indicator did turn over before that recession began, and in particular real money supply and the yield curve have come nowhere near their recession signals at this point, while housing permits after going more or less sideways for 4 months, finally made a new high (ex-NY, the state responsible for the May-June upward distortions) in November.

It is usually wrong to think that "it's different this time," but I have no problem *modifying* the usual rules to take into account the growing secular trend of a more balanced globe.  Thus, *if* I see a decline in housing and cars that is about half of what would in the past have signaled a recession, and at the same time if there is a renewed surge in the US$, I do not think I will wait longer before going on recession patrol. 

Monday, December 28, 2015

Five graphs for 2015: final update

 - by New Deal democrat

At the end of last year, I highlighted 5 graphs to watch in 2015.  Let's look back one last time.

#5.  Mortgage refinancing

After a mini-surge at the end of January (light brown in the graph below) due to low mortgage rates (blue), refinancing applications fell back to their post-recession lows during spring. With a decrease in rates in summer and autumn, there was a small increase, but we are still nowhere near the level of refinancing we saw in 2010 and 2012.  Mortgage News Daily has the graph:   

Over the last 35 years, refinancing debt at lower rates has been an important middle/working class strategy.  There is little room left for that strategy, and it looks like we have seen the low in rates for this expansion -- and possibly for this lifetime!  If the middle class makes more progress in real income, it will have to come from further decreases in consumer prices (if that is possible), or increases in wages.

 #4 Gas prices

Here is a graph of average hourly wages for nonsupervisory employees (red) compared with gas prices (blue) since the bottom in gas prices in  1999 (both series are normed to the same value as of November 2015): 

How long must a worker labor in order to buy a gallon of gas?  After skyrocketing in the lead-up to the Great Recession, gas prices collapsed, helping the consumer start to spend again on other things at the bottom of that recession.  The steep drop in gas prices late last year and again this year took us almost all the way back to that bottom.  In 1986 and 2006, at first consumers saved the money, but once they loosened their pursestrings, the economy responded. Consumer spending, particular on durables like houses and cars, is what is keeping this expansion going.

#3 Part time employment for economic reasons 

 Next is a graph of part time workers for economic reasons expressed as a percentage of the labor force.  This is one of the big positive stories of the year.  Over the last 10 months, this has fallen by about 0.6% or 900,000:

In the longer view, this is  still 1.5% (about 2.25 million) above the boom level of 1999 and about 1.0% (1.5 million) above the level of 2007, but is at least finally close to its 1994 - 2007 range:

#2 Not in Labor Force, but Want a Job Now

This moved generally sideways during the first three quarters, before declini ng sharply in the last 2 months:

It just made a new post-recession low and is about 1.2 million, or 0.8% of the workforce, above its 1999 and 2007 lows. Still, this is only half the way back from its recessionary highs.
 #1 Nominal wage growth  

After 3 poor readings last August, December, and February, YoY growth in nominal wages for nonsupervisory personnel fell  back close to their post-recession lows before rebounding this spring.  It has recently been stagnant at about +2% YoY. .  In the below graph, I have subtracted 2.0% fromYoY nominal wage growth, and 9.9%  from the U6 unemployment rate, to set both to zero at their current levels: 

In the 1990s and 2000s, nominal wage growth started to accelerate when the broad U6 unemployment rate fell to 9.9% and 9.7% respectively.  Last December saw an anomalous big decline in average hourly wages, so it is likely that with the next employment report to be released next week, nominal wages will finally break out significantly above 2% YoY. 

  In summary, this year we made significant improvements in 3 of the 5 metrics, with only slight improvements in two others:  
  • Involuntary part time employment has declined substantially.  
  • Low oil prices have continued to benefit consumers, although the strong US$ has muted their effect on the overall economy.  
  • Wage growth, driven in part by the decline in the broad unemployment rate, has finally shown a pulse, but not much more.
  • In the  last several months, there has finally been a big decrease in the number of people not even in the labor force, but who want a job now.
  • Refinancing is still at low ebb.  For the economic expansion to continue for a substantial time, we must either see a new low in rates (very unlikely), or real wages must continue to grow (at the moment looking likely).
Still,  if current trends continue, we won't achieve real, full employment like 1999 or even  2007 for about another 18 months to 2 years! 

Next week I will detail 5 graphs for the year 2016.  Some of the most critical graphs will change, and some will remain the same.