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

Interest rates: no shift in the economic weather yet

Interest rates: no shift in the economic weather yet

I wanted to make two comments about what has been happening recently with interest rates, a short term look and a long term look.
Today let’s discuss the short term.
Since September, long term Treasury interest rates have risen from roughly 2.1% to 2.8%. The two year Treasury yield has risen from roughly 1.3% to 2.1% — which means that for the first time in years, the 2 year Treasury is giving you more in interest than the dividend yield from holding the S&P 500. So, not only will interest rates presumably slow the economy, in terms of income they are now a *relative* bargain compared with holding a wide index of stocks.
Now, I don’t pretend to know where interest rates will go from here over the short term. Whether long rates rise over 3% or fall back under 2.5%, I don’t know. But let’s assume that over the short term they stay roughly where they are now.
An upward spike in interest rates has happened twice in this expansion.  Most recently, rates spiked from under 1.5% in mid-2016 (thank you Brexit!) to 2.6% following the US presidential election (blue in the graph below).  Here’s what happened with housing permits (red) and real GDP (green) in the year following that spike:
Permits stalled for most of 2017 before turning up, while GDP also paused before continuing to advance.

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Fraying at the edges? *relative* underemployment increases

Fraying at the edges? *relative* underemployment increases

This is a post I’ve been meaning to put up all week (after all, this week was going to be very slow on data and news, right?).
As the expansion gets more and more mature, the *relative* performance of certain measures of improvement become more interesting.  One of those is the comparison between U3 unemployment, and the broader U6 underemployment measure.
While we only have about 25 years of data, so caution is warranted, generally speaking, during that time as the expansion has improved, an increasing number of the more marginally employable find jobs. As a result, U6 declines faster than U3. Later on, as the expansion begins to wane, U6 underemployment has weakened first:
Another way of looking at this is to subtract the U3 unemployment figure from that of the broader U6 measure:

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Jobless claims make another record low

Jobless claims make another record low

One reason not to get excited about the last week’s stock market swoon is that it isn’t being confirmed by any other short term leading indicators.  Most significantly, jobless claims.
The 4 week moving average of new jobless claims has fallen below 225,000. This is yet another 40 year record low. In fact, with the exception of six weeks in the early 1970s, it’s a new 50 year low.
And adjusted for population growth, it is a new all-time low.
As a practical matter, virtually nobody is getting laid off.  This is not an economy that is about to roll over.

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A comment about the markets for the average reader

A comment about the markets for the average reader

This is a post aimed at the generally Progressive audience of this blog who followed us over from way back in our days at Daily Kos, rather than the financially sophisticated audience who have picked us up since (but of course everybody is welcome to read and appreciate!).
Anyway, at times like this over 10 years ago Bonddad used to write posts like “A comment about the markets” for the DK audience, explaining the “significance” of the market action. So in that tradition ….
First of all, don’t base any investing decision on advice from anyone you read online — including me.  If you are concerned enough, go talk to a registered financial professional. In particular, at times like this, the Doomers are going to come out of the woodwork, especially at places like Daily Kos. It got to the point that in years past, I used to use the “Pied Piper of Doom” at DK as a contrary indicator.  I once even called the bottom of a market selloff similar to the present one *in real time* based on his panicky post.
That being said. here’s my take based on over 25 years of watching the markets closely, and seeing this kind of selloff maybe 20 times. Moves of 3% or more a day are based on emotion, either euphoria (less likely) or panic (more likely!), or more recently, “algorithms gone wild!” (think of the “flash crash.” That is a very bad basis on which to make a decision about your money.
Because I am a nerd, and I always show you graphs, here’s a three-pack to put this in perspective.  First, here is the entire 1990s, the second half of the biggest bull market in history:

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Why I’m not impressed by January’s 2.9% YoY wage growth

Why I’m not impressed by January’s 2.9% YoY wage growth

I wanted to follow up on why I dissented Friday from the near-consensus take that workers finally got a nice raise, with many citing hikes in the minimum wage. As you may recall, the YoY% change in the average hourly earnings of all employees rose 2.9% as of January.
That was the story in, for example, Marketwatch:

Average hourly wages jumped 9 cents, or 0.3%, to $26.74, according to the Bureau of Labor Statistics. That means wages have increased 2.9% over the last year — the biggest gain since the end of the Great Recession in June 2009.The federal minimum wage is $7.25 an hour and hasn’t increased since 2009. But many states and municipalities enacted laws to raise the wage this year.

Even progressive sources like The American Prospect touted the number, under the headline, “The Proof is in: Minimum Wage Hikes Work”:

{A]verage hourly earnings for private-sector workers increased by 0.34 percent this month, and 2.9 percent over the past year.Wage levels have struggled to gain traction in recent years, even as the labor market has tightened. But for labor economists and workers alike, these most recent increases could be a sign that wages might finally be on the upswing, thanks to progressive state policies. In the new year, 18 states across the country—from Florida to Maine, and from Washington state to Michigan—hiked their minimum wages, bringing $5 billion in additional pay to 4.5 million workers, according to the Economic Policy Institute.

The reason I dissented is that the YoY% increase for nonsupervisory workers was only 2.4% — right in the range it has been for over a year.  As Jared Bernstein, who called the number “A Nice Wage Pop,”  pointed out:

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January jobs report

January jobs report: good headline growth, mostly negative internals. UPDATE: THE BOSSES GAVE THEMSELVES A RAISE

HEADLINES:
  • +200,000 jobs added
  • U3 unemployment rate unchanged at 4.1%
  • U6 underemployment rate rose 0.1% from 8.1% to 8.2%
Here are the headlines on wages and the chronic heightened underemployment:
Wages and participation rates
  • Not in Labor Force, but Want a Job Now: declined -137,000 from 5.308 million to 5.171 million
  • Part time for economic reasons: rose +74,000 from 4.915 million to 4.989 million
  • Employment/population ratio ages 25-54: fell -0.1% from 79.1% to 79.0%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose +$.0.03 from  $22.31 to $22.34, up +2.4% 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 by +15,000 for an average of  +17,300 a month 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 increased by 100 for an average of -46 a month vs. the last seven years of Obama’s presidency in which an average of -300 jobs were lost each month

November was revised downward by -36,000. December was revised upward by +12,000, for a net change of -24,000.

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What’s behind the big Q4 decline in real median weekly wages?

What’s behind the big Q4 decline in real median weekly wages?

[Note: This is a post I was working on last week. I hypothesized that the employment cost index would validate the analysis. Well, I didn’t get around to posting it, and the ECI came out this morning. So, how did I do? ]

Last week the Bureau of Labor Statistics reported that real weekly median wages declined by over 2% in the 4th quarter of last year!  This is quite the anomaly in the face of generally good data that has been reported in the last few months.
Dean Baker put it in context, noting that for the year 2017, real weekly median wages rose signficantly over 2016:
But I thought I would dig deeper to see why the anomaly had occurred.  So I took a detailed look at each of the three qualifiers: “real,” “median,” and “weekly.”  Where did the downturn come from?

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Is the economy partying like it’s 1999?

Is the economy partying like it’s 1999 ?

Suddenly I have a lot to say about the economy. My sense is that we are on to a new phase after the 2015 shallow oil-patch centered recession and 2016-17 rebound. The data has a feel to it of a late cycle blowoff.
Let’s start with this morning’s personal income and spending.  In the last 4 months, personal consumption expenditures, like retail sales, have taken off:
Typically after mid-cycle personal consumption expenditures outpace retail sales (10 of the 11 previous cycles, to be precise). This is so regular that it is a primary mid-cycle indicator for me.

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A note on December existing home sales

A note on December existing home sales

First of all, sorry for the light posting this week.  There’s not much news until tomorrow and Friday, and yesterday was a travel day.  So…..
While existing home sales are about 90% of the entire housing market, they are the least important economically, because of their much more limited impact since they do not involve any new construction.

That being said, December’s existing home sales, at 5.57 million annualized, were only 1% above last December’s pace. First and foremost, that’s a matter of higher mortgage rates this year. In fact, mortgage rates haven’t made a meaningful new low since 2013 — although they briefly neared that low in late 2016 — and that has shown up in a gradual deceleration of the pace of sales since that time, as show by Bill McBride’s graph below:

Figure 1

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