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Industrial production: strong finish to 2018

Industrial production: strong finish to 2018

Industrial production for December was reported this morning at +0.3%, slightly better than estimates. But what was really surprising is how strong the manufacturing component was, up over 1%:

With this reading, YoY industrial production for manufacturing improved to +3.4%, and overall production came in just below 4%:

This is in contrast to the sharp slowdown we saw in both the December regional Fed indexes and the ISM manufacturing index.

This was a good finish to 2018. Despite this, I am expecting a substantial slowdown within the next 6 months. If the government shutdown proves intractable, the odds of recession by mid-year increase strongly.

Notes on the government shutdown

Notes on the government shutdown

I have a post on the housing market pending at Seeking Alpha. If and when it goes up there, I will link to it here.

In the meantime, here are a few important notes on the shutdown.

I can’t find the quote now, but about a week ago it was floated that Trump could “save face” by declaring an emergency, starting to build the wall, and then allow the government to open. Then Trump indicated that if he declared a state of emergency, that wouldn’t mean that he would open the government even then. This is a win-lose capitulation transaction, and Trump is bound and determined to show dominance over the Democrats.

Aside from the fact that there is a large portion of the GOP that is taking advantage of this to “drown the government in a bathtub,” now that a Federal judge has turned down government workers’ “involuntary servitude” challenge, Trump has a ready-made force of de facto slaves that he can recall — or not — depending on whether he wants a particular government program to work or not:

Rank-and-file Democrats reject Trump’s invitation to shutdown talks, back Pelosi in opposition to border wall

The nearly 50,000 furloughed federal employees are being brought back to work without pay — part of a group of about 800,000 federal workers who are not receiving paychecks during the shutdown, which is affecting dozens of federal agencies large and small. A federal judge on Tuesday rejected a bid by unions representing air traffic controllers and other federal workers to force the government to pay them if they are required to work.

Don’t hold your breath waiting for SEC workers or those necessary to issue food stamps to be recalled.


Flying blind

Flying blind

The government shutdown is affecting some important economic indicators. All of the series published by the Census Bureau, including retail sales, manufacturers’ and wholesalers’ data, personal income and spending, new home sales and housing permits and starts, are not being published.  It appears that GDP is not going to be published by the BEA either.

In the past I have created work-arounds for a few economic series, in particular new jobless claims and industrial production, neither of which appear affected at this point, as the former is published by the Department of Labor, and the latter by the Fed.

If the government shutdown continues — and a long shutdown, until there is widespread pain or an avoidable disaster (like a plane crash or widespread food-borne disease outbreak) looks like the most likely scenario for now — I will attempt serviceable work-arounds for at least some of these series.

For starters, retail sales was scheduled to be released this Wednesday. Almost certainly that isn’t going to happen, so on Wednesday I’ll publish a guesstimate that hopefully will at least get the direction correct, and capture some of the strength or weakness of that direction.

But, make no mistake, not having access to reliable economic data isn’t just a drawback for me, it’s a cost to any enterprises attempting to make decisions. Some of those businesses are going to postpone making a decision — on hiring as well as spending — until they have more clarity. And the postponement of spending decisions means a drag on GDP and employment.
Unfortunately it appears that the spate of short shutdowns in the past several decades have caused Washington to “learn” that, at least in the short term, nothing too bad happens when government is closed. Thus, flying blind will continue until we crash into something.

Good news from the employment report: workers are finally getting raises!

Good news from the employment report: workers are finally getting raises!

When it comes to jobs, if there is one trend that really set apart 2018 from any prior year of this expansion, it is that ordinary workers are finally getting decent raises.

Let’s start by looking at the monthly % change in average hourly wages for non-managerial workers for the entire duration of this expansion. Since this has averaged about +0.2%/month, I’ve subtracted that so that any month above 0 is an above average increase in nominal hourly pay for ordinary workers:

Look at the far right. In ten of the last twelve months, average hourly wages have increased by more than the norm for this expansion.

As a result, YoY nominal wage growth in the last two months has been a little over 3.3%:

December jobs report: 2018 goes out with a bang

December jobs report: 2018 goes out with a bang

  • +312,000 jobs added
  • U3 unemployment rate rose +0.2% from 3.7% to 3.9%
  • U6 underemployment rate unchanged at 7.6%

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

Wages and participation rates

  • Not in Labor Force, but Want a Job Now:  declined -70,000 from 5.397 million to 5.327 million
  • Part time for economic reasons: declined – 124,000 from 4.781 million to 4.657 million
  • Employment/population ratio ages 25-54: unchanged at 79.7%
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.09 from  $22.95 to $23.05, up +3.4% 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?  

On the government shutdown, Pelosi should go maximalist

On the government shutdown, Pelosi should go maximalist

It’s pretty clear that the House GOP has decided to simply punt the government shutdown into the new Democratic House majority’s laps.

That new House Democratic majority will have two basic options: (1) go accomodationist; or (2) go maximalist.  I am here to write in support of option #(2).

To recap, before the government shutdown, the Senate had passed a stopgap measure by 100-0. When RW extremists got Trump’s ear, he (as usual) welched and refused to sign any bill that did not include funding for his border “wall.” The House GOP promptly passed a bill doing so, and there matters have stalled for the last 10 days.

The “accomodationist” option is for the new House majority to pass the bill that is identical to the one that already passed the Senate by 100-0. It is very unlikely that this will work.
In the first place, Mitch McConnell has announced that he will not bring to the Senate floor any bill that will be vetoed by Trump. Since Trump has already indicated he will veto the existing Senate bill, McConnell might simply refuse to bring it back up. Even if he does, it is almost certain that Trump will veto it. Even if the Senate GOP feels they cannot renege on their prior votes, a 2/3’s majority must still be found in the House.

Marking my 2018 forecast to market

Marking my 2018 forecast to market

At the beginning of every year, I give a forecast for each of the two halves of the year. And at the end of each year, I look back and mark my forecasts to market. In that way I try to be completely transparent, and to keep myself honest.  Since we’re at the end of 2018, let’s look back to last January and see how I did.

In my forecast for the first half of 2018, I wrote:

This year the call is pretty easy.  With the exception of a hurricane-induced whipsaw in September and October, for the last year the L.E.I. [Index of Leading Economic Indicators] has improved by about .4% a month. This strongly suggests clear sailing in the first half of 2018.

….  if you wanted an even easier, quick and dirty approach to a short term forecast, you can simply chart weekly initial jobless claims and the S&P 500 (both of which are components of the LEI).  If both of those are still making new lows/highs respectively (and they have been), then the economy should be in good shape for the next few months.

….They’re good and so is the near term economy.

As I wrote at the time, that was a pretty easy call, because there had been a surge last autumn of almost all of the leading indicators.

Could an Oil Patch decline turn a 2019 slowdown into an outright recession?

Could an Oil Patch decline turn a 2019 slowdown into an outright recession?

One of the items I mentioned in my piece yesterday at Seeking Alpha was the recent big decline in oil prices. Please go read the piece, it puts a couple of pennies in my pocket! But in that article I referenced the decline in industrial production that was caused by the 2014-15 decline in gas prices. I wanted to follow up a little here.

In 2014 into early 2015, Oil prices declined by almost 75%, from a little under $110/barrel to a little under $30/barrel. Gas prices declined from close to $4/gallon to about $1.75/gallon:

The recent decline in oil and gas prices, while significant, is less than half of that.

Energy extraction is counted in the “mining” component of industrial production, but even the “manufacturing” component declined between the end of 2014 and mid-2016:


November housing permits boosted by multifamily dwellings

November housing permits boosted by multifamily dwellings

November was a *relatively* good month for housing permits, as in, improved *relative* to most of this year, although not at the heights of last winter.

Most importantly, the least volatile number, single family permits, was flat compared with last month, and down -2% from a year ago:

There’s no change of trend here.


The US economy did not boom in 2018

The US economy did not boom in 2018

At the beginning of each year, I try to identify economic series that I think will be most important in the next 12 months.  This year I asked: Is the US economy going to enter a Boom in 2018?

There is no standard definition of a Boom. But in my lifetime there have been two occasions when the “good times” feeling was palpable, and the economy was working extremely well on a very broad basis: the 1960s and the late 1990s tech era. During both times,  employment was rampant and average people felt that their situations were going well.

Back in January I identified five markers that, taken together, marked off the two eras as unique:
  •  the low unemployment rate
  •  the duration of a very good rate of growth of industrial production
  •  strong growth in real average hourly wages
  •  strong growth in real aggregate hourly wages, and
  •  increasing inflation.

Now that the year is ending, let’s update all of these.

1. Unemployment remains very low

In both the 1960s and late 1990s, the unemployment rate (note that the U6 underemployment rate wasn’t reported in its current configuration until 1994, and so is not helpful), hit 4.5% or below for extended periods of time:

While these weren’t the only two periods of low unemployment, they are among those that stand out.

We had already hit that marker at the beginning of the year, and through the course of the year, it has only improved:

The unemployment rate is now the lowest in 48 years, since 1970.

2. Industrial production did briefly boom, but has backed off.

During both the 1960s and 1990s, production grew at or over 4% a year for extended periods of time, not just right after the end of a recession.  At the beginning of this year, production was under 4%: