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

Nailed it!

Nailed it!

Three weeks ago I wrote No, the Meuller report ***DID NOT*** “find no collusion!” in which I lambasted and parsed Barr’s conclusory snippet of the Mueller report, to wit, that “[T]he investigation did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.”

I pointed out that:

 … the bracketed [T] in Barr’s quote of Mueller is doing a lot of work. Because it means that there was a first part of the sentence that was omitted. Put that together with the fact the Mueller’s quote then specifically references that “the investigation did not establish …” and there is compelling evidence that the first part of the actual sentence was a qualifier. …. Almost certainly the first part of the sentence is something like “Although…’” “Since …’” or “Despite …” followed by “the investigation…”,  or a formulation like “The grand jury’s work is incomplete, and so the investigation …”

(Emphasis added)

Now that we have (most of) the actual Mueller report, we know that the complete sentence reads:

Although the investigation established that the Russian government perceived it would benefit from a Trump presidency and worked to secure that outcome, and that the Campaign expected it would benefit electorally from information stolen and released through Russian efforts, the investigation did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.”

(Emphasis added)

Exactly as I thought, and said. The first part of the sentence Barr quoted severely qualified the portion he chose to highlight.

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March real retail sales very strong, but no “all clear” yet

March real retail sales very strong, but no “all clear” yet

This morning’s retail sales report for March was very strong on both a nominal basis, up +1.6%, and also on a real, inflation-adjusted basis, up +1.2%. At the same time, it is still ever so slightly below its peak of five months ago, and YoY real sales have not recovered to those typical for this expansion. Let’s take a look.

Below are real retails sales for the last few years, and because it is a long leading indicator, real retail sales per capita (in red):

As revised, both of these last made new highs last October. So the good news is, the weakness of the last few months has been entirely reversed. The caution is, we still don’t have a new high, although this data series is notoriously noisy.

 

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YoY Industrial production and structural changes to the US economy since 1980

YoY Industrial production and structural changes to the US economy since 1980

No big economic releases today, so let me follow up further with a few long-term comments on industrial production.

This series goes back 100 years to the beginning of 1919. Since that time it has turned negative YoY 25 times:

Of those 25 times, 17 have been during recessions, sometimes having started shortly beforehand. On only 8 occasions have negative YoY readings not been associated with recessions. That’s better than a 2:1 rate of correct readings vs. false positives, with no false negatives.

But it gets better. If you take out the 4 times industrial production has been negative YoY for only one month — July 1954, July 1967, July 1989, and January 2014 — that’s 17 correct calls and only 4 false positives, a ratio of better than 4:1.

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Industrial production continues to decelerate

Industrial production continues to decelerate

Industrial production is the King of Coincident Indicators. In dating the onset and end of recessions, in practice the NBER relies upon industrial production more than any other measure.

March 2019 production continued a string of recent disappointments, with overall production declining -0.1%, and manufacturing production unchanged. For the first quarter of 2019 in total, overall production declined -0.3%, and manufacturing declined -0.8%. Here’s the graphic look at the past nine years:

Note that the recent flatness is on par with, e.g., 2012, which was nowhere near to recession.

But on the other hand, after a surge last summer, leading some to conclude that we were in a “boom,” both total and manufacturing production have decelerated sharply on a YoY basis. Both levels YoY were last seen in late 2017:

 

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February JOLTS: a mirror of the poor jobs report

February JOLTS: a mirror of the poor jobs report

The JOLTS report on labor is noteworthy and helpful because it breaks down the jobs market into a more granular look at hiring, firing, and voluntary quits. Its drawback is that the data only goes back less than 20 years, so from the point of view of looking at the economic cycle, it has to be taken with a large dose of salt.
With that disclaimer out of the way, Tuesday’s JOLTS report for February generally mirrored the poor jobs report (+20,000, revised to +33,000) for that month. With the exception of one new high, the other series are off their best levels, and two continued to decline:

  • Quits declined -0.1% from their peak of one month ago.
  • Hires declined and are -3% off their October peak.
  • Total separations rose slightly but remain about -2% off their peak in last July.
  • Job openings declined about -7% from their October all time high, which was virtually tied one month ago. While this is a sharp decline, it has typically happened once or twice a year in this series even during expansions.
  • Layoffs and Discharges rose slightly and remain about 9% higher than their September 2016 low, although well below their levels of most of the past 18 months.

Let’s update where the report might tell us we are in the cycle.
First, below is a graph, averaged quarterly through the fourth quarter, of the *rates* of hiring, quits, layoffs, and openings as a percentage of the labor force since the inception of the series (layoffs and discharges are inverted at the 3% level, so that higher readings show fewer layoffs than normal, and lower readings show more):

 

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Real wages got gassed in March

Real wages got gassed in March

The consumer price index rose +0.4% in March, mainly as a result of a big monthly increase in gas prices. That really shouldn’t have been a surprise, since almost every time gas prices have increased by as much as they did in March — up 9% for the month — consumer prices as a whole have gone up at least +0.4%. I’m showing just the last 10 years in the graph below:

In fact, ex-gas, consumer inflation ex-energy has been remarkably stable between 1.5% and 2.5% YoY ever since gas prices made their long term bottom in early 1999. The only big exceptions were in the year before each of the last two recessions:

 

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Downturn in manufacturing new orders adds to evidence of slowdown

Downturn in manufacturing new orders adds to evidence of slowdown

I don’t normally pay much attention to the new factory orders report, because it is simply too noisy to be of much use. But as of February’s report, released Monday and showing a -0.1% decline in “core” new orders, there is enough to at least take notice.

Here are overall new factory orders (blue, left scale) and “core” new orders (red, right scale) for the past 25 years:

In the first place, while they clearly turned down in advance of the 2001 recession, which was a producer-led recession, that wasn’t the case at all, especially for “core” new orders, in the 2008 recession, which was consumer-led. Further, there is so much monthly noise that monthly readings don’t give you reliable signal until the turn is well underway.

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I told you so: the March employment report showed a slowdown in the leading sectors

I told you so: the March employment report showed a slowdown in the leading sectors

For the past few months, I have been forecasting a jobs slowdown. That has been based in part on the natural progression of a downturn in long leading indicators, then short leading indicators, and finally to coincident indicators of which jobs along with industrial production are the Queen and King, respectively.

Further, I have pointed out that, even when the spread between short and long term bonds simply gets tight, even if there is no outright inversion, employment growth almost always falters. And goods-producing employment – including manufacturing and construction jobs – has *always* faltered in the past 60 years.

Finally, since temporary jobs are a well-known leading indicator for jobs as a whole, I have been expecting them to slow down if not turn down.

March’s jobs report  delivered all of this in spades.

But I received a little blowback on this point, suggesting that the declines were trivial or that I was retrospectively cherry-picking to support a Doomish hypothesis. Far from it: this is something I’ve been forecasting for months in specific sectors, and in the last three months, even in the face of big overall employment gains, it has shown up.

So, to set the record straight, before I get to the March graphs, let me recap the literally 15 times I warned of a coming slowdown in manufacturing, construction, and temporary jobs, and in the goods sector  generally. If you don’t want to read the “I told you so” part, just scroll right past number 15 to the bolded headline and you’ll get right to the March jobs graphs.

The 15 times I forecast an oncoming slowdown in leading employment sectors

1. Last August: the simple tightening of the yield curve suggests a subsequent jobs slowdown

Four times during the 1980s and 1990s the difference in the interest yield between 2 and 10 year treasury bonds got about as low as it is now [Note: i.e., August 2018] (blue in the graphs below). That occurred in 1984, 1986, 1994, and 1998.

Even though on none of those 4 occasions a recession followed, on 3 of 4 of those occasions YoY employment gains … subsequently declined …

In other words, even if the Fed stops raising rates now [as of August 2018], and the yield curve does not get tighter or fully invert, my expectation is that monthly employment gains will decline to about half of what they have recently been — i.e., to about 100,000 a month — during the next year or so.

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March jobs report: good nowcast, concerning forecast

March jobs report: good nowcast, concerning forecast

HEADLINES:
  • +196,000 jobs added
  • U3 unemployment rate unchanged at 3.8%
  • U6 underemployment rate unchanged at  7.3%

Leading employment indicators of a slowdown or recession

 

I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. With one exception, these either decelerated or outright declined.

  • the average manufacturing workweek was unchanged 40.7 hours. This is one of the 10 components of the LEI. It is down -0.6 hours from its peak during this expansion.
  • Manufacturing jobs declined by -.6,000. YoY manufacturing is up 209,000, a big deceleration from last summer’s pace.
  • construction jobs rose by 16,000. YoY construction jobs are up 246,000, also a big deceleration from last summer.
  • temporary jobs declined by -5400. YoY these are up +44,900. These are only up 3700 in the past 5 months, a big slowdown.
  • the number of people unemployed for 5 weeks or less fell by -68,000 from 2,194,000 to 2,126,000.  The post-recession low was set 10 months ago at 2,034,000.
Wages and participation rates

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

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March news good so far; the Fed has plenty of scope to cut rates

March news good so far; the Fed has plenty of scope to cut rates

While we are waiting for tomorrow’s jobs report, let’s step back for a moment and look at where we are in the big picture of the economic cycle.

So far, March data is running pretty positive.  In addition to the decent ISM manufacturing report I discussed the other day, motor vehicle sales turned out to be excellent, topping 18 million annualized:

The ISM services index, like the manufacturing index, also downshifted, but continued positive:

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