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

What I’m watching for this week

What I’m watching for this week

This week is going to be a really busy one for economic data. I’m not going to be able to do detailed posts on everything. But because in the past couple of months most of the data has gone against my “2019 slowdown” scenario, I thought both in the interests of transparency, and to put down a few benchmarks to anchor my analysis, I’d write down what I am looking for in each release.

Monday – personal income for March; personal spending for February (!) and March. Yes, we’re still playing catch-up in data releases delayed by the government shutdown. Both of these are important to my “mini-recession” hypothesis. The February spending number might still be punk, but I am expecting spending in particular to come roaring back in March, especially after the blowout March retail sales report. Basically, I think the last 45 days of Q1 pulled the economy back from a brief downturn in the first 45 days:

Tuesday – Q1 Employment Cost Index. This is a median measure of wages and benefits. It has been improving for several years now, and I am expecting it to continue. The Case-Shiller house price index also comes out Tuesday. The question will be whether house prices continue to outpace income, which I think is the case, and is one reason why the economy may be slowing, as $$$ paid on the mortgage or rent can’t be spent elsewhere. And finally, I’ll be checking to see if the weekly temporary staffing index continues to be negative.

 

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New home sales suggest housing bottom is in

New home sales suggest housing bottom is in

New home sales are extremely volatile, and extremely revised, but they do have the advantage of probably being the single most leading housing statistic, ahead of permits and starts.

So it is noteworthy that new home sales for March rose to 692,000, below only one month in late 2017 when they hit their expansion high of 712,000:

I have been looking for the bottom in housing, as mortgage interest rates have fallen in the past 5 months, and purchase mortgage applications have risen to new expansion highs:

 

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Commercial and industrial loans: another sign of a slowdown?

Commercial and industrial loans: another sign of a slowdown?

There are lots of cross-currents in the economy right now. At the absolute tip of the spear is the decline in interest rates since November, which has led to an improvement in some of the housing market metrics. In the shorter-term outlook, a simple quick-and-dirty metric of initial jobless claims (new 49 year lows) and the stock market (just made new all-time highs) suggests all clear. But there are contrary signs as well. For example, the weekly measure of temporary jobs by the American Staffing Association just fell to -1.8%, its worst YoY comparison since the 2015-16 shallow industrial recession.

Here’s one other little tidbit. Yesterday I read an article elsewhere about how a near-term recession isn’t in the cards, citing among other things a declining delinquency rate for commercial and industrial loans. Here’s their accompanying graph:

True enough, although if you look carefully, in the lead up to both the 1990 and 2008 recessions there were only two quarters of significant increases off the bottom before the recessions began. Since the latest data in the graph is for Q4 2018, a similar pattern wouldn’t rule out a recession beginning as soon as Q3 of this year, i.e., July.

 

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How increasing local oligopolization has distorted the housing market

How increasing local oligopolization has distorted the housing market

Earlier this week new home sales for March were reported, soaring to a new expansion high bar one month (November 2017). Something else that a few other writers picked up on: the median *prices* for new homes fell to a level not seen in the past two years, off -11.8% from their peak, also in November 2017:

With mortgage rates also down at approximately where they were in January 2018, the carrying cost of a new house has declined by over 10% overall, enticing lots of new potential buyers into the market.

All well and good. But my reaction went a little beyond that: “Holy crap! Builders can slash their prices by almost. 12% and still make a profit?!?” 

 

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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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