Relevant and even prescient commentary on news, politics and the economy.

November jobs report: another good report with some signs of deceleration

November jobs report: another good report with some signs of deceleration

HEADLINES:

  • +155,000 jobs added
  • U3 unemployment rate unchanged at 3.7%
  • U6 underemployment rate rose 0.2% from 7.4% to 7.6%

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

Wages and participation rates

  • Not in Labor Force, but Want a Job Now:  rose +88,000 from 5.309 million to 5.397 million
  • Part time for economic reasons: rose +181,000 from 4.621 million to 4.802 million
  • Employment/population ratio ages 25-54: unchanged at 79.7%
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.07 from  $22.89 to $22.95, up +3.1% YoY.  (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 +27,000 for an average of +20.000/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 +400 for an average of +75/month vs. the last seven years of Obama’s presidency in which an average of -300 jobs were lost each month

September was revised downward by -13,000. October was revised upward by +1,000, for a net change of -12,000.

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.

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A note about the financial markets

A note about the financial markets

The markets are closed today in observation of former President George H.W. Bush’s funeral. In the meantime, let me offer a brief few observations (pontifications?) about my sense of the immediate and longer term trend.

First off, here is a broad look at the last 10 years for the S&P 500 (blue, right scale) and 10 year Treasury bond (red, left scale):

The moves in the bond market look exaggerated, because the values are between 1.4% at its lowest, and 4% at its highest. Basically in the last 10 years yields on the 10 year bond completed their slow decline from about 20% in 1980, then went sideways 2011 and 2017, and this year started what I suspect will be an equally long term climb (although whether they will peak in a few decades at 6% or 600%, I have no clue).

Meanwhile the stock market quadrupled in value (!), although with a few hiccups along the way, particularly in 2010, 2011, 2015-16, and this year.

In other words, in the past 10 years bonds paid you very little, while stocks rewarded you handsomely.

Next, let me take a look at a few of those hiccups. First, here is the 2010-11 period:

Note that on several occasions (roughly mid-2010 and mid-2011) stocks declined by roughly 10%, and bond yields declined in tandem.

The same pattern appears in October 2014 and January 2016:

This is called a “flight to safety.” Stock investors get spooked for some reason or other, and run into the relative safety of bonds. Stock prices fall, and bond prices rise, which means bond yields fall.

That’s what I think is happening at the moment. After a 40% run-up beginning immediately after  the 2016 US Presidential election (20% of which was in December 2017 and January 2018 alone):

this year stocks have gone sideways in roughly a 15% range:

In the broad view, investors got too exuberant in 2017 mainly, I suspect, in anticipation of the tax cut goodies, and once the goodies took effect, realized that all of their value – and then some – was already priced in. In the close-up view, the past month looks like another “flight to safety.”

NOTE: Complete speculation alert!: Because these things tend to inflict surprise on as many people as possible, my *guess* is that the carnage will continue until roughly the moment that 2 to 10 year bond yields invert. Then, once people are sure that the end is nigh, both will reverse higher, at least temporarily ending the inversion.

Finally, what is also interesting about this year is that it appears to mark a “change of season” in the relationship between stock and bond performance. From 1981 through 1998, stock prices and bond yields generally moved in the opposite directions (stocks up, yields down). Then, from 1998 until this past January, bond yields and stock prices tended to move in the same direction — not on a daily basis, but in the longer view. This year, as the first and third graphs above show, stock prices and bond yields have again generally become mirror images of one another.

This year’s pattern (with rising bond yields) last happened in the 1950s, which was a period of “reflation,” i.e., bond yields and the YoY change in prices gradually increased. That’s another reason why I think we have started a new secular financial era.

End of observations/pontifications.

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Strong manufacturers new orders in November ISM report

Strong manufacturers new orders in November ISM report

There are a lot of economic writers who won’t tell you when something moves against their thesis. Those guys trumpeting a flatlining of commercial and industrial growth last year? They never heard of it this year (hint: because it’s up!).

To the contrary, one of the reasons I do my Weekly Indicators piece is that it forces me to mark my forecasts to market each week. If a forecast doesn’t work out, I want to undertake a post mortem and understand why.

I certainly don’t have to do that today, but yesterday one piece of evidence did move against my thesis of a slowdown next year: ISM new orders for November.

As I reiterated in today’s piece at Seeking Alpha on yesterday’s yield curve inversion, the long leading indicators have pretty much been deteriorating all year long, to the point where for the last three weeks they have been negative. So there is simply a lot of evidence to suspect that the economy is going to follow suit after a year or so.

In the meantime, I’ve started to focus on whether the short leading indicators are also beginning to show signs of weakness. One such measure is manufacturers’ new orders. On a semi-weekly basis, I track that via the regional Fed indexes. On a monthly basis, the ISM new orders index is the go-to metric.

Well, one month ago the ISM new orders subindex declined to nearly a 2 year low. Then, during November, the average of the five Fed regional indexes declined further. So far, looking pretty good for my hypothesis.

Then, at the last minute, the Chicago PMI Index completely blew out to the upside, including a very strong new orders index. And yesterday, the ISM report’s new orders subindex for November rose back strongly. Here’s the graph, from Briefing.com:

Yesterday’s reading was about average from earlier this year.

So, fair is fair. Yesterday’s ISM report is contra my thesis. On the other hand, the general trend over the last few months has been a gradual backing off from extremely strong growth seen at the beginning of this year.

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Why this Friday I’ll pay particular attention to the temporary jobs number

Why this Friday I’ll pay particular attention to the temporary jobs number

With the long leading indicators outside of corporate profits and ease of credit having turned neutral to negative, at least for now, my attention is turning more and more to the short leading indicators. And one of those — temporary employment — is of particular importance to the overall employment situation. It is reported as part of the overall monthly jobs report, and I will be paying particular attention to it when the November jobs report is issued this Friday.

Since the BLS started to report the series in 1991, temporary employment has tended to peak roughly 6 to 9 months before overall employment, and to bottom roughly 3 months in advance:

Here is the same information graphed as the YoY% change (note I’ve divided temp growth by 4 for purposes of scale):

 

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The recent rise in initial jobless claims: signal or noise?

The recent rise in initial jobless claims: signal or noise?

Yesterday initial jobless claims for the prior week were reported at 234,000, a six month high. That’s 32,000 above the recent one week low. The four week moving average rose to 223,250, more than 15,000 higher than its recent low:

Is it cause for concern? After all, the long leading indicators have been neutral for half a year, and in the last several weeks their more volatile high frequency version turned negative, so it is reasonable to expect short leading indicators to start to follow suit.

To cut to the chase, while it is certainly possible that it is the beginning of something worse, we aren’t anywhere near the point where we can rule out it simply being noise (although it certainly suggests that the monthly unemployment rate isn’t going to decline any further in the next few jobs reports, since initial claims lead the unemployment rate by several months). I’ve arrived at a formulation for distilling signal from noise, which will be the subject of a longer post, but consider this an introductory sketch.

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October personal income and spending strong

October personal income and spending strong

In October personal income increased 0.5%, and personal spending increased 0.6%. These are both very strong increases. Further, as the graph below shows, real inflation adjusted income and spending both also rose:

These are coincident indicators that form part of the quintessential nowcast. Real personal income adjusted by transfer payments and real personal spending are two of the very series the NBER looks at to determine the onset and ending of recessions.

As a result, they don’t tell us anything about where we are going vs. where we’ve just been. Further, because these have been subject to very dramatic and very late (as in, years later) revisions, I’m putting even less stock in them. Still, I’d much rather they be strongly positive than negative, so this is evidence that the consumer economy remained strong in the first part of this quarter.

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Q3 corporate profits increase

Q3 corporate profits increase

Third quarter corporate profits were released as part of the first revision of GDP this morning.  Since corporate profits deflated by unit labor costs are a long leading indicator, let’s take a look.

Here is the raw corporate profits table released by the Bureau of Economic Analysis:

Lines #3 and #11 are the two we are interested in. Both measure corporate profits after tax, with and without inventory adjustments. The first increased quarter over quarter by +3.3%; the second by +0.7%. Note that this q/q result (as opposed to YoY) is not affected by the tax cut enacted last December.

A few weeks ago, unit labor costs were reported to have increased by +0.3% in the third quarter.

As a result, regardless of which way we measure, corporate profits increased in Q3.

Between increased corporate profits and loose lending, as reflected in the Senior Loan Officer Survey several weeks ago, the producer side of the economy continued to do very well through September.  Although several other long leading indicators, most importantly interest rates and housing turned negative by the end of September, this is enough to confirm that, left to its own devices, the economy should not roll over into recession in the first three quarters of next year.

The “left to its own devices” part in the above sentence, however, is an important qualifier right now, because it does not include the effect of Trump’s tariffs. This is an ongoing and generally haphazard public policy intervention into the market, and the early results, as measured by rail traffic in particular, have been negative. It is simply impossible for me to do anything more than guess how much that might change the conclusion. At the most, I would hazard that Trump will continue to add tariffs, and that it *could* take a weak economy, such as I already foresee for next summer, and tip it into contraction.

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October new home sales plummet — but take it with a big grain of salt

October new home sales plummet — but take it with a big grain of salt

As you may have already read elsewhere, new home sales plunged -8.9% in October to the seasonally adjusted annual rate of 544,000. Here’s the accompanying graph:

BUT … take this with a big grain of salt. The reason I rely on building permits, espectially single family permits, is their much smaller volatility, and *much* smaller rate of revisions.

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“On my wall, the colors on the maps are running”

“On my wall, the colors on the maps are running”

Two years ago in a post entitled “Those who cannot see must feel”, I wrote:

That’s the translation of an old German saying that I used to hear from my grandmother when I misbehaved.  It is pretty clear that, over the next four years, the American public is going to do a lot of feeling ….  The results will range somewhere in between bad, disastrous, catastrophic, and cataclysmic, depending on how badly foreign affairs are bungled ….

I have some hope … because both China and Russia are smart enough to figure out that they can get what they want by bribing Trump without resorting to armed conflict.

Although I never published it here, below is the conclusion of an email I sent to several correspondents six months ago:

Ever since Trump’s election, the lyrics of Al Stewart’s song about the 1937 Spanish Civil War, “On the Border,” have been going through my mind:

“On my wall, the colors on the maps are running …”

and I have thought that 2019 is the time of maximum peril to Taiwan and Ukraine.

The midterms were less than three weeks ago. Today Russia blocked the Kerch Strait, entrance to the Sea of Azov, effectively cutting off one of Ukraine’s ports. Ukraine says its navy is leaving port.

Between now and the end of 2019 is the most dangerous time, because any potential U.S. Foe will want to have any aggressive move be a fair accompli by the time the 2020 U.S. Elections are underway, let alone by the time a replacement for Trump can be inaugurated.
Good luck to us all.
[UPDATE: In case you’ve never heard it, here’s a link to the song.]

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October housing permits and starts flat vs. trend

October housing permits and starts flat vs. trend

This morning’s report on housing permits and starts will do nothing to stop the now-received wisdom that higher interest rates, higher prices, (and the impact of the cap on the mortgage tax deduction) has caused this most important cyclical market to cool. On the other hand, they aren’t evidence of any intensifying downturn.

While we wait for FRED, here’s the Census Bureau’s graphic representation of permits, starts, and completions:

Here are the basic important numbers:

  • single family permits  down -0.6% m/m -0.6% YoY
  • total permits -0.5% m/m -6.0% YoY
  • total starts -+1.5% m/m -2.9% YoY
  • 3 month average of total starts +1.0% m/m +3.2% YoY

 

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