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

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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Watch for temp jobs weakness in Friday’s employment report

Watch for temp jobs weakness in Friday’s employment report

Yesterday I looked at manufacturing jobs, and goods-producing jobs generally, as two what to look for in Friday’s jobs report.

Today let’s follow up with temporary jobs, an acknowledged leading indicator for jobs as a whole.

As I wrote about a couple of months ago, the American Staffing Association’s Staffing Index does a good job forecasting the trend in temporary jobs in the monthly employment report.

And here, the news is becoming slightly, but more and more, negative. In the four week period through the end of March, the YoY comparison slipped to -1.7%, its worst yet:

The index went negative YoY at the turn of the year, and has gradually deteriorated since.

 

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Manufacturing slowdown apparent, but no contraction

Manufacturing slowdown apparent, but no contraction

With yesterday’s ISM report for manufacturing in March, let’s take an updated look at this sector, with a particular emphasis on what to look for in this Friday’s jobs report.

The ISM manufacturing index, and its more leading new orders sub-index, both continued positive in March, with the former at 55.3 and the latter at 57.4. Both of these are good, solid, positive numbers. Here’s the updated graph from Briefing.com:

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No, the Meuller report ***DID NOT*** “find no collusion!”

No, the Meuller report ***DID NOT*** “find no collusion!”

This past week I nearly became apoplectic about he malfeasance of much of the press and the punditry reporting of Barr’s 6 paragraph substantive “summary” (3 paragraphs each as to “collusion” and “obstruction of justice”) of Mueller’s roughly 300 page report.

As an initial matter, because Mueller’s grand jury is continuing to meet, and there are still subpoenas and witnesses outstanding, it is incorrect to say that “the investigation” has concluded. clearly “the investigation” is ongoing. What *has* concluded is Mueller’s involvement as special counsel, now that an Attorney General has taken over who did not have to recuse himself. Keep that basic point in mind.

But that’s not what got me livid. Much has already been covered by others. But it is one important, even fundamental, aspect of Barr’s executive summary on which I wanted to focus.

Start with the fact that Barr is a very good attorney. He is going to choose his words, and what he cites and what he omits with great care. Now, this is the *totality* of the language from the actual Mueller report that Barr quotes as to collusion:

“[T]he investigation did not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.”

Barr repeats this formulation virtually verbatim twice more in his letter. Here’s the second time:

Stop right there. Let me just slightly reword Barr’s money quote:

“[T]he investigation established that members of the Trump Campaigndid not conspire or coordinate with the Russian government in its election interference activities.”

All I did was change the phraseology (in italics) slightly. But the meaning is much more definite and sharper. In my formulation above:

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Real personal income and spending sag

Real personal income and spending sag

Along with jobs and wages, household and personal income and spending are my main focus on how average Americans are doing in the economy.

We’ll get the next jobs report a week from now, but today we got – almost updated to the present – January personal income and February personal spending.

First of all, in my rubric of long leading, short leading, and coincident indicators, both of these are coincident. They tend to top out, or at least sharply decelerate, right when a recession begins. Here’s the performance of income including the last two recessions, and spending for the last one:

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The last long leading indicator, corporate profits, declined in Q4 2018

The last long leading indicator, corporate profits, declined in Q4 2018

Three months after the quarter ended, corporate profits for Q4 of 2018 were reported this morning, and they were down slightly (-0.1%). Here’s the quote from the BEA:

Corporate profits deflated by unit labor costs are a long leading indicator. Since these costs were already reported at +1.6% q/q, that means that adjusted corporate profits were down about the same percentage.

>Earlier, proprietors income for Q4 had been reported at positive, but that is a less accurate placeholder. In contrast, Q4 corporate earnings for the S&P 500, with 99.7% reporting, declined over -3% q/q.

This means that, in Q4 of last year, almost *all* of the long leading indicators declined, the first time that has happened since – perhaps not coincidentally – shortly before the last recession.

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