Setting a baseline for a manufacturing slowdown

If I am right that by roughly midyear 2019 the economy will experience a substantial slowdown, then we ought to start seeing a deceleration in the leading indicators for manufacturing soon. Additionally, if rail transportation is accurately signaling that a slowdown is already hitting due to the impact of Trump’s tariffs and China’s retaliation, producers ought to be noticing the effects almost immediately, and begin to react.

Which makes me think that manufacturing new orders, as measured monthly by five of the regional Feds and also the ISM, ought to start slowing down by the end of this year.

To establish a baseline, I’ve gone back and obtained the average of the five Fed regional reports (first column), and the ISM new orders index reading (second column) since the beginning of this year.  Without further fanfare, here they are:

JAN   15   65.4
FEB   20   64.2
MAR   16   61.9
APR   17   61.2
MAY   28   63.7
JUN   24   63.5
JUL   24   60.2
AUG   17   65.1
SEP   20   61.8
OCT 18  N/a

The ISM Manufacturing Index, including new orders for October, will be reported Thursday morning.  Here’s what it looked like through August:

Readings above 60 are particularly strong. So the first thing I am looking for is decelerating growth which will show up in a reading below 15 in the average of  Regional Fed reports, and below 60 in ISM new orders.

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When the stock market headlines the political blogs . . .

Here is a graph I saw on Digby’s blog this morning:

There was also a highly-recommended, heavily-commented piece at Daily Kos.

Here’s a pro tip: when you see a daily stock market move leading the political blogs, it’s a sign of a bottom, not a  top.

That’s because it’s a sign of emotion, and it means that amateurs are paying close attention. By the time that happens, the big move is over, or at least almost over.

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A follow-up on the reasons for prime age labor force non-participation

Here is something interesting I found in an article by staffers at the Kansas City Fed a couple of weeks ago.

They broke down the 25-54 prime age labor force participation group for men into 10 year slices, by education, and by reason for not participating in the labor force. They focused on men, because including women confounds the results by the secular societal change whereby women entered the labor force en masse between the 1960s and 1990s.

First of all, it turns out that the prime decade driving the increase in non-participation is the 25-34 age group:

That finding is amplified by breaking down each prime age decade by education level:

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An update on yield curve dynamics

So I submitted this wonderful piece to Seeking Alpha Tuesday morning, and figured I would just link to it today. But as in the best laid plans of mice and men, somehow it reverted to a draft without ever being reviewed by the site’s editors, which means it isn’t up there yet and there is no big economic news today.

Sigh.  So in the meantime, consider this ….

The bond market is behaving in totally typical fashion in response to the Fed raising interest rates.  Typically the yield curve doesn’t invert because long duration yields come down to short duration yields. Rather, *all* durations of yields rise. It’s just that shorter duration yields rise faster, and ultimately overtake longer duration yields.  Here’s the relevant graph for the past 40 years

If we think of interest rates as “the cost of renting money,” then the economy slows because that cost increases across all time frames, and enough producers and consumers decide to put off “renting money” in order to purchase things that the economy slows down or goes into reverse.

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New home sales bombed in September

Needless to say, this morning’s report on new home sales was another big miss in the housing sector. Not only were sales a new 12 month low, they were the lowest in nearly 2 years, and are off over -150,000 from their peak 10 months ago:

Typically new home sales are down about -200,000 when a recession starts.

That median prices have fallen in sync with sales, and not with their typical lag:

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September existing home sales: yet another poor housing report

While existing home sales are roughly 90% of the entire housing market, they are much less important as an economic indicator because they do not have the knock-on effects of construction improvements, and less of the landscaping and indoor improvements, that new homes do.

But they certainly do help us track the trend. And like housing permits and starts, and new home sales, the trend has not been good this year.

In September, existing home sales were at a 5.15 million annualized trend, down for the sixth month in a row, down YoY, and close to a 3 year low. Further, existing home sales have not made a new monthly high since last November, 10 months ago. The 3 month average has not made a meaningful new high since April of last year.Here’s what the last year (excluding this month not shown) looks like:

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September JOLTS report: a jobs market moving from thriving to hot

Tuesday’s JOLTS report once again confirmed the very good employment report from one month ago, with two series making all-time highs and one an expansion high:

• Quits ust below their all-time high set one month ago
• Hires made a new all-time high
• Total separations made another new expansion high
• Layoffs and discharges spiked back to average levels for this expansion
• Job openings made yet another all-time high

Let’s update where the report might tell us we are in the cycle, remaining mindful of the fact that we only have 18 years of data. Below is a graph, averaged quarterly, 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 2% level, so that higher readings show fewer layoffs than normal, and lower readings show more:

 

To put this in context, during the last expansion:

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Tracking Trump’s tariffs: US vs. Canadian rail loads

Let me start out by saying that there is an excellent case for the US imposing a VAT (“value added tax”) similar to those enacted by Canada and European countries in order to recapture the losses due to far lower wages in China and other developing countries. Additionally there is an excellent national security rationale for not entering into”free trade” agreements with authoritarian governments who will use the benefits to build up their militaries. Not that this is what Trump is doing, of course.

In any event, I’ve already noted that the weekly rail report by the AAR seems like an excellent way to track the impact of Trump’s tariffs, especially via intermodal units which are used for ocean shipping. This week I happened on another excellent usage: comparing US vs. Canadian real loads, both of which are monitored weekly by the Association of American Railroads.

To the point, here’s what year to date growth in US (first graph) and Canadian (second graph) rail loads looked like 2 months ago:

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Subdued September inflation means real hourly and aggregate wages grow

Courtesy of subdued gas price increases this year vs. one year ago, overall consumer prices rose only 0.1% in September vs. 0.5% one year ago (and 0.3% over the last two months vs. 0.9% one year ago). As a result, YoY CPI growth is down to 2.3% vs. 2.9% several months ago, and that means that “real” wages increased, despite no movement in growth nominally YoY.

With that background, let’s update real average and aggregate wages.

Since nominal wages for non-managerial workers are up 2.7% through September, this means that real wages, which had been flat, have grown in the last few months by +0.4% YoY:

In the last 2 1/2 years, real wages had been essentially flat. The last couple of months moves the needle a little bit:

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On the rise of German militarism

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