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Monday, July 28, 2014

The Depressing Post

I've made several attempts at this, but they are all so depressing that I end up wandering off with a headache. So now I'm just going to dump it. 

A) You may or may not have noted the Yellen (Sweet Monetary Manna Mama, aka SMMM)/Bullard-Fisher contretemps (Axis of Purported Liquidity Rationalization, aka APLR)

SMMM claims that theoretical unemployment rate masks an underlying labor slack that is very destructive to the economy, and thus rate increases will be deferred. APLR claims that conditions are such that the Fed has met its goals and must proceed quickly to raise rates while they still can. 

Who's right? First, I think the Fed really had a meeting and drew lots to distribute the Inflation Hawk suit. They're worried enough about that 4.5 T on the books that this time there were two short straws. Thus the flight of APLR falcons. We may all pause to admire their arabesques through the skies of NYC as they attempt to bring down the Black Ben Helicopters. But don't pause for too long, because it's all a play done to convince CYNK-buying financial types that WE ARE ON THIS THING WE HAVE IT UNDER CONTROL DO NOT WORRY about inflation.

Fisher may be taking his role a bit too seriously, because he mentioned the unmentionable in his July 16th speech - tailing off on reinvestment of that 4.5T. Right now they are reinvesting principal and interest proceeds, which far exceeds the theoretical QE that they are tailing off. So until they all start talking about letting that portfolio run off, they are not serious about liquidity constraints. It's just a fireworks display. 

But why are they willing to do make fools of themselves in public? They have two huge problems. They don't know how to manage either, much less the two together. 

Problem 1
This is the population-adjusted core employment graph. It's the number of the employed among the 25-54s divided by the civilian free-roaming 25-54s population. It is clear we DO have labor slack. Note that there is a considerable degree of part-time employment in there.

Problem 2 is, yea verily, like unto it, an unlovely thing cursed of G_d and man.

This is the ratio of trade receivables (cash coming in) of non-financial corporates divided by total liabilities (what they owe) of non-financial corporates. I have helpfully added the Fed Funds rate indexed on the right. These figures come from the Flow of Funds report.

In short, the Fed response has caused the acceleration of debt-loading of corporates, to the point that they are very susceptible to any increase in interest rates. Since the end of the last recession US corporates have added about 2.4 Trillion in corporate bond debt and over  2 Trillion in credit market debt.

Households have lightened up a bit, but not nearly enough. This is the equivalent graph for Households & Non-profits:

So it is clear that our reckless spending is not going to bail the corporations out, no matter how sapphire the screens get.


The implications are that households and corporations are both extremely negatively sensitive to interest rate increases. They are both extremely negatively sensitive to tax increases. They are extremely negatively sensitive to cuts in government funding.

Now note the long time period these graphs cover. Much has been made of the post WWII expansion, but the population and the business population then had relatively high cash flows in relation to liabilities, which implied that they were extremely favorably responsive to both tax rate cuts (it was a high tax environment) and interest rate cuts. 

There was a huge recession in the 50s - one of the most severe ever - and when Eisenhower was building those roads he was funding expansion. When Kennedy showed up, his tax cuts had an impressive pay back.

But now we really don't have much room for tax cuts. We don't have much room for ANYTHING. 

All of the financial machinations of the Fed have really done very little to change the long term trajectory of the US economy, which in fact they conceded already. Have you looked at their long term growth forecasts lately? This is their March projection, and here is their June projection. Compare to their June 2013 projection.

So the reason for the Fed-and-Booty Play being enacted in the skies over NYC is that they are trying to talk the markets into anticipating better rates, so that they have the room to raise them without shocking the real economy. I don't think it's going to happen, given the regime in DC.

Absorb this, and then we can go onto the ACA/economic weather forecast thing. You folks may have stronger constitutions, but there's only so much misery I can handle at one time.

Saturday, July 19, 2014

Materials and Strengths

Like probably just about everyone else, I have been appalled by the latest news. It seems that most everywhere one looks, new conflicts and new refusals to deal with them are popping up even while our pretend solutions for previous problems are wearing very thin. 

I mean, it's a damnably depressing day when one's reaction to Israel going into the Gaza strip is "Finally!" 

I will get back to posting, but first, something that's the opposite of depressing

It's supposed to go into production soon, and this 3D printer can print carbon-fiber on a matrix. 

This is causing me intense positive emotions, and I am going to enjoy just thinking about the possibilities for a few days. 

Surely US education is all wrong? We are wasting tremendous sums of money educating a lot of people in skills we don't need, when the basic education to work with such tech is really almost absent. There can never have been a time when a basic technical education can provide any individual with such huge opportunities? 

If you have kids, getting them into this sort of thing very early - late elementary school to junior high - would be a great investment.

 

Monday, July 07, 2014

PS: Full-time Jobs Level

This depresses me, and hey, it's Monday, so I just have to share. This is the LEVEL of full-time jobs, long view, seasonally adjusted:



Short view:

Yes, it has recently fallen, but if you look at the little sawtoothed formations that have shown up each year at this time post the GR, that is the effect of education jobs plus SA. Our economy is still top-heavy to government and education, and when those campuses shut down for the summer it looms up in the stats. 

So I can't say whether the recent trend to add full-time jobs is still intact or not. It requires a few months.

In service economies, full-time jobs drop off hard after recessions and only recover years later. Only in manufacturing economies do you see the quick fall and quick rebound. 

Next, ACA and employment.

Sunday, July 06, 2014

Employment - What Does It Really Say?

First, I think that the employment report was so-so. Not great and not terrible. Not a promise of endless prosperity, and not a harbinger of doom.

The claims that the number of jobs are very favorable economic omens generate skepticism. The details of the report make it look like marginal job creation. Because of the end of school, these may be part-time jobs that really are not substitutions for full-time jobs - seasonal adjustment is very tricky in June. 

But even if that is true,  this sort of thing is just BS, cubed:
Job growth blew past expectations and the unemployment rate fell to the lowest level since before the financial crisis peaked six years ago, creating a firm foundation for a stronger U.S. economic expansion.
It really should ping everyone's nonsense meter, too, because this shortly follows:
The 1.39 million increase in employment over the past six months is the biggest over a similar period since early 2006. 
What was happening in 2006? We were slipping into an industrial recession, which was consequently followed by the end of the financial cycle in 2007. We all know the rest of the story. . If we had not been in the middle of a large credit expansion in 2006, with PCE being increasingly fueled by funny money borrowing, we would have seen recession much earlier - although of course it would have been much milder. 

It's better to take honest recessions as they come rather than trying to go postal, monetarily speaking. But the BIS just tried to explain all that, and word has it that Krugman is still frothing at the mouth and leaping at the windows, so perhaps I should drop that topic for this post.

The problem is that job creation, as is also true for asset valuation, does not serve as a good predictor for economic expansion over the next year. There's usually a late spike in employment figures - it's not even a good six month predictor. 

Now one indicator that was favorable until June was the growth of full-time jobs. Unfortunately that did reverse in June, but it may return again in the fall. 


This is YoY percent change in three employment indicators - all, full-time, and part-time. It's a bit busy, so:
This is just all and full-time - the green line is all. But you can't see much detail, so:
Between the two you can get a sense of what's what. In earlier times, the US was a highly industrial economy, and employment was more predictive although the changes were sharper. Nowadays, we are a service-heavy economy, and services don't respond to output as much as consumer spending. 

If you will refer to the long series and the short series, you can see how absolutely odd the employment shift looked in 2006 - but that's because we didn't need to work. We could all just borrow more money on our houses. So it took a long time to sag out, although doom was clear in 2005. 

We do not have the same opportunity this time.

Other things are apparent. There is usually a spike in full-time employment and employment right before the trend shifts. There is often a difference in the initial shift - full-time employment falls whereas that green line (all) hangs in there a bit. I believe that is due to better uptake of part-time jobs rather than better creation of part-time jobs. I do watch for that pattern a bit, although I basically ignore most employment stats when figuring trends. 

There is one employment stat I have found predictive - the YoY change in covered jobs from the initial claims database. This one, in a service economy, does seem to have some predictive value. It at least tells you when to get nervous when the rest of it looks a bit dispirited:
Note that in a manufacturing economy, it doesn't. If you look at the short version so you can see more detail:
You can see that it does seem a bit predictive of when the trend is ending and can generally be used to give about a year's warning.  Again, this is PERCENT CHANGE YOY, not simple levels. 

However I am a bit skeptical of that indicator right now because ACA should be playing a part, and I am not sure how much of a part. The earlier trend in this number you see before downturns is not causative - it's a result of the factors causing the slackening of growth. So my reasoning right now is that this may be showing the result of ACA, and should be less reliable this time.ACA should distort this UP, so it may be more predictive!

What is strongly predictive? Causative factors, such as percent change in real personal disposable income, PCE (we generally consume less if we don't have money), and gross private domestic investment. There are two types of slumps  - business-led and consumer-led. Once one half of the slump really gets going it generally will draw in the other.

Now, should I do this? On July 4th weekend? Well, I'm going to, because I have a busy week ahead and I probably won't get to it otherwise, but I'm sorry. 

I know this is busy, but basically when these all start to correlate, ya gotta problem. We've had this problem for over a year. GPDI joined the party last quarter. 

The reason why we had low inflation was basically that we at a level of economic activity associated with recession. It's one of those economic factors that gets you out of recession, or prevents you from really falling into it, because it increases real disposable personal income. Note that a lot of the spikiness in real disposable personal income has been due to tax changes - timing of dividends and payouts, plus FICA. But the FICA effect has fallen out. Now it's just going to be whatever's going on in the economy - and the employment report did not support any theory that we are all suddenly going to be earning more in a real sense. 

GPDI is on the right side of the graph and it's just percent change. It's naturally pretty spiky. Still, aside from fracking, it's hard to figure out how many companies are going to be spending more. Profits aren't good, the money really isn't circulating on the consumer side, export orders are a bit light in many industries, and the business climate can best be described as BOHICA. 

I know we are not in an active recession now (in which a majority of these factors knot up around each other and start pulling each other down), because if we were freight would show it, and it doesn't (it did show the decline in the first quarter and then the resurgence). Q1 was just the combination of bad factors in a structurally weak economy. The inventory cycle rolled through, and we got a couple of better months. 

But ACA has got to be an additional negative correlating factor, because ACA affects most people who got insurance through their employer, and the changes now afoot pretty much require individuals to pay more for less. This means that statistical real disposable personal income is significantly overstated, and that we are heading into a sustained Keynesian spending tunnel.

The green line (GDPDI) is going to come back up. But I don't expect it to come up that far. 

The bottom line is that this expansion is getting old, and without a real surge in income, it sags out and then collapses:
The reason you could have such a big hit in the first quarter was just that growth is minimal, so we are always kind of rotating around the axis of recession.

Friday, July 04, 2014

Happy Independence Day!!!!

The significance is that this is the day that we officially got the right to address our own problems. 

We got a shot at it. That's all, and it's a wonderful thing! There isn't much better in life.

I hope you all enjoy the day.

Thursday, July 03, 2014

Not Bad - Update Tomorrow

What's nice about today's employment report is that the Apr-June gains reported in the Household Survey started to mesh with the gains reported in the Establishment Survey.

I will expand tomorrow, but look at the Household survey. Unemployment rates dropped sharply for adult women, for those with just a high school education, and for those with some college but no degree. Unemployment rose a tad for those with a college degree or better.

Unemployment dropped sharply for blacks - thank heaven!!! That rate has been far too high for far too long. Overall a lot of that has been due to a younger population, but enough's enough. ...

Part-time employment rose by 275K compared to an overall monthly gain of 407K. 

We have finally escaped the rule of 58, with the emp/pop ratio coming in at 59.0. Finally!!!!



Monday, June 30, 2014

BIS: Wouldja stop with the QE edibles, already?

This is the 84th Annual Report. Page link:
A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth

The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI). 

To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.
By "financial cycle" they mean debt cycle.  This is the table of contents. When you read headings such as Global financial markets under the spell of monetary policy, you sense skepticism.

When you start reading, you realize they are throwing down the gauntlet:
 Financial cycles differ from business cycles. They encapsulate the self- reinforcing interactions between perceptions of value and risk, risk-taking and financing constraints which translate into financial booms and busts. They tend to be much longer than business cycles, and are best measured by a combination of credit aggregates and property prices. Output and financial variables can move in different directions for long periods of time, but the link tends to re-establish itself with a vengeance when financial booms turn into busts.
In other words, if you're not fixing Main Street, you're not fixing Wall Street if the cause of Main Street's problems was originally the financial cycle rather than the business cycle. 
While there is no consensus definition of the financial cycle, the broad concept encapsulates joint fluctuations in a wide set of financial variables including both quantities and prices. BIS research suggests that credit aggregates, as a proxy for leverage, and property prices, as a measure of available collateral, play a particularly important role in this regard. Rapid increases in credit, particularly mortgage credit, drive up property prices, which in turn increase collateral values and thus the amount of credit the private sector can obtain. It is this mutually reinforcing interaction between financing constraints and perceptions of value and risks that has historically caused the most serious macroeconomic dislocations.
I would recommend reading at least this section. There's a lot of detail in it, and one of the central implications is that easy monetary policy in large countries has created a new set of correlations which are likely to be even more independent of central bank policy.

Pendings

Once when one cuts through all the shouting, the upshot is that Pending Home Sales remain significantly below last year's levels. On an NSA basis, -6.9%, with all regions clocking in negatively. The Northeast and South have relatively small declines at -2% and -4%. The Midwest and West are a little more decided on the matter, coming in at -8.4% and -14.3%.

So the upshot is still that we cannot look to home sales to carry the recovery forward into 2015. 

Construction takes a while to peak and fade, so 2015 is the danger point.

Hobby Lobby/Conestoga decision is out, holding that closely held corporations do have religious protection under RFRA It seems to be about what I expected - a narrow ruling. The fun is going to be in the concurrences and dissents. 

Perhaps the next Obama legislative initiative will be to mandate that anybody above a certain net worth must buy a car? In that case, and in that case only, the Hobby Lobby decision might have a national impact.

Thursday, June 26, 2014

BofA Economists Smoke Or Eat Really Good Weed

Unfortunately, the result appears to be somewhat Maureen Dowd-like confusion rather than cosmic clarity. 

Exhibit 1: 
The weekly petroleum update through March.  Remember that really bad winter we had? This should have vastly increased the demand for heating oil (distillate), NG and propane. But look at the Products Supplied, and see the YTD drop for propane, the almost flat distillate (2.9% YTD, +0.6% last four weeks), and the huge drop in propane supplied for the last four weeks.

You know what that means? Consumers ran out of money, and so did a lot of businesses, so they turned the thermostats WAY down in just about unison. There was a corresponding drop in late-season deliveries in the affected areas. I know because I was so concerned I called some suppliers.

This meant that consumer spending in the second quarter would be affected. People who owed money would have to recover and pay off that bill, and those who didn't but had still turned down the thermostat would be socking money away for the next potential winter disaster. Nothing induces spending caution like having to live in a house at 58 degrees for six weeks when it is very cold outside. Rising food costs would reinforce the caution.

Exhibit 2:
Today's Personal Income and Outlays report.Many of those who do not inhabit the BofA Colorado economic prediction center have realized that Q2 is about over. While unquestionably economic activity rebounded, it really did so in March. Since, it appears that consumers have pulled back a bit, probably because they are doing so while they still can. 

So today's real consumer spending report covers the first two months of the second quarter, and the so-far figures are -0.2 April and -0.1 May. This compares to Q1 revised of -0.3 Jan, + 0.3 Feb and +0.8 March. 

Call me a troglodyte unenlightened slide-rule bearing primitive non-enlightened economic life form, but those figures make sense given the history, so I don't expect massive upward revisions in real PCE for this quarter.

PCE accounts for over 2/3rds of GDP, so no matter how ebullient the rest of the economy is, it seems unlikely that Q2 annualized can come out over 2.6-2.8% at this point.

Exhibit 3:
See, when you don't inhabit the Economic Weed Dome in CO,  you naturally go looking for confirmation of your assumptions. So what would be an indication that consumers outran their cash flow due to excessive basic costs in Q1, and will have to recover in Q2? Heh! Credit card debt. We can find that in H8. 
Note that this is seasonally adjusted, all commercial banks. That sudden "hockey stick" formation begins 3/26 and ends 6/11.Call me a crazy sober person, but the very strong correspondence with the sudden separation of demand and supply for winter fuel makes me suspect causation.

Call me a weed-edibles deficient economist, but that says to me that consumers are still struggling to comp, and that we have further consumer caution ahead. 

Now admittedly I have never eaten a hash brownie in my life, and thus can't really be in tune with up-and-coming economic thinking. But all my experience tells me that consumers are going to be getting those CC bills, and that they will have to recover over the summer. Their ability to fully do so seems somewhat questionable, especially since post-ACA, many of them are paying sharply higher copays and medical costs, with higher medical deductibles. This cuts into other spending, and it is in no way confined to the relatively small number of individuals who in fact have ACA policies.

So, marijuana chocolate aside, it looks like the rest of the year will be constrained on the consumer side. A lot depends on the weather, because utility bills in the southern regions are the big bank account drainer for the rest of the country that was not so winter-struck, and thus a correlating drive.

This leads me to a 75-80% certainty of consumer-led recession beginning in Q2 2015, becoming blatant at the end of Q3 2015. If we had a light winter next year maybe not - maybe the extra would produce a spending rebound in Q2 2015. 

The Fed did not get it last  year. They are moving counter-cyclically again, but I really don't know what they have left to shoot with. It's very hard to correct a consumer-led downturn from basically broken finances. That takes fiscal policy, not monetary policy. It's likely that the Fed would only make things worse if they tried to strongly ramp up the QE.


Wednesday, June 25, 2014

That Incredible Recovery

Real GDP rolling annual percent change:



As you can see, we just can't get out of the recession zone in any convincing manner. So while we may not be in a recession, we remain so close that it does feel recessionary.
:


-2.9%, Annualized

I was expecting something pretty bad after the last quarterly services survey, but not quite this bad.

The real source of the sudden downward revision is ACA, which sharply cut healthcare spending, and is still cutting healthcare spending. More on that later, but let's just say the earlier figures were strongly based on the idea that Americans have money to spend on health care when they don't even have money to spend on food. As a fantasy artifact, it was worthy of Walt Disney. 

Somewhat transient negatives were a truly awful winter and the need to pull down inventories. Those effects have passed out of the economy, but the income effect for many households probably hasn't.

Permanent factors remain - the rise in taxes on investment (hiking capital gains tax is remarkably counterproductive), a generally anti-business environment, and the fact, as so eloquently stated by Yulva in the comments on the last post:
Most people cannot afford a home even if you gave it to them for free…
It's incomes, stupid. It's cash flow. Real personal incomes ex current transfer benefits grew less than 30 billion from the previous quarter. Real disposable personal incomes (includes government benefits, subtracts taxes) grew about 43 billion. That's aggregate, so the reality is that higher needs expenses really cut into effective discretionary incomes last quarter.

Neither corporate profits nor Gross Private Domestic Investment show a strong economy. We are not really in a recession, but we are in a structurally VERY slow growth economy. From the quarter one year ago, corporate profits after taxes and when including inventory and capital consumption dropped 5.9%. Cash flow with inventory valuation adjustments fell 6.1% over four quarters.

GDI was approximately the same at -2.6%. 

I will post more later, but I am not sure when due to a pretty tight schedule.
 

Monday, June 23, 2014

The Volcano of Recession Is Rumbling

The last strong leg holding us out of a decline is autos. It's not clear to me how long that can stand, esp. given the administration's fixation on honeybees, dreamers and increasing consumer and business power costs. 

There is only one chart you really need to look at to understand why the ground seems to be quivering. I did not make it.

Here, from our dear NAR is a graph of May's existing home sales YoY broken out by sales price:
Ah! The economic weather report rears its ugly head once again. It only rains and snows on the less well-off.

Now compare this to the CW rhetoric:
“While the housing market has improved dramatically overall compared to where it was a couple of years ago, the recent recovery has been a little more choppy,” Chief Executive Officer Ara Hovnanian said during an earnings conference call on June 4. 

 Household formation will be the primary driver of long-term housing demand, he said and “the creation of well-paying jobs will go a long way” toward boosting the market. “Given the low levels of total U.S. housing starts, we remain convinced that we are still in the early stages of the housing industry recovery,” Hovnanian said. 
Well, it appears that starter homes ain't exactly where the market is, right? 

In other news, the Clintons aren't really well off! Fortunately, oil and gas prices are rising nicely, which should help to stimulate a few more sales in that 1 mil plus price range.

Existing home sales are down 8.2% YoY for May if you look at the raw numbers. You can get all the NAR stats here.

The economy is not in a recession now, but it's losing steam rapidly, and unless the administration's initiative to protect honeybees somehow bears strong economic fruit, next year is highly problematic. If real wages aren't rising, and if aggregate hours worked aren't rising, the only thing we can count on to spur spending is SS & Disability. Those cash flows get sapped quite quickly by inflation.

Rail data for the first quarter showed a strong contraction, which we will get confirmed in the next GDP report. It's something like an annualized -1.8%. But rail data then picked up strongly, and now shows a much, much healthier picture. Both Mexican and Canadian data show the continuing difficulties for NA as a whole, so I am not expecting honeybee miracles.

Some might claim that trying to ban pesticides when food prices are this high might be self-defeating, but hey, give the dream a chance.

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