Different bloggers have been posting their favorite charts of 2019 this January. So I decided to post my favorite chart of the past 20, or more, “years of the long bond yield versus the long run trend.” Bond yields are now below their long run trend and may be at or near a secular bottom. Of course no one rings a bell at the turning point so we probably will only identify the bottom long after it actually occurs.
In October the real trade deficit fell to $79,133 (million 2012 $) from the third quarter average of $84,713 (million 2012 $), a 6.6% improvement. This implies that the fourth quarter is starting with trade making a significant large boost to fourth quarter real GDP growth. Remember, the trade balance is the difference between two very large numbers so a small change in either exports or imports can generate a large change in the balance. The year over year percent change in exports is down -0.6% and imports have fallen -4.1%. But since the December, 2018 peak, the real trade balance has contracted -13.2%.
When you look at the details of US real trade, the changes in trade stem largely from oil and consumer goods. Other trade categories, like food, industrial materials, capital goods are each showing relatively small changes that are largely offsetting each other. For the most part both imports and exports of other goods have been stagnant for the past year. The drop in auto and consumer goods imports reflects several points.
The new world of the US being an open economy after the leap . . .
I first met Volcker when I was a junior international economist in Washington in the late 1960s. He was the Treasury Under Secretary for International Economics. I was going to a luncheon at the National Press Club for the Indian Finance Minister. As I got on the elevator, Paul Volcker and John Kenneth Galbraith — among other things he was the US Ambassador to India under Kennedy –followed me on. I am 6’2″ — or at least I was back then — but they were both well over 6’6″. I honestly believe that was the only time in my life that I was the shortest economist in the room.
This was back when they had the annual International Monetary Fund( IMF) meeting in Nairobi, Kenya. The standing joke was that they had the meeting in Nairobi so everyone could compare Volcker to an actual giraffe.
With the presidential election still a year away, Wall Street is starting its normal analysis that if a democrat is elected it will cause a devastating stock market crash. One would think that after all these years of such claims being proven dead wrong that the street would finally give up on it. In the post WWII era from Truman to Obama it is 70 years and each party has had bad candidates in office for half that time. Truman was only President for seven years and five months so the Democrats only had 35.4 years in office while the Republicans had 36 years in office. Over these years the average annual S&P 500 gains was 15.9% for Democrats and 6.6% for Republicans. If you look at the actual returns, you would think if anything; Wall Street analyst would be warning about the dangers of a Republican President for the stock market.
Because the chart is already so cluttered I left Truman and Ike off. But it seem so obvious that the record shows that it is Republican Presidents that investors should fear. Just to clearly show that stock market gains have been more that double under Democrats versus Republicans I’ve also presented the data in a table.
Despite all the recent stock market volatility the actual S&P 500 PE on trailing operating earnings is almost exactly where my model says it should be.
The biggest problem is that the market PE is about 19 and bond yields are under 2%. The quick and dirty rule of thumb is that a 100 basis point change in yields should generate a 100 basis point change in the S&P 500 PE. With bond yields already under 2% the upside potential for the market PE is under 200 basis points — driving the PE to the upper limit of the fair value band.
Consequently, further market increases are almost completely dependent on earnings growth. But currently, unit labor cost are rising faster than prices as measured by the non-farm business deflator and world economic growth remains very weak. While this spread is a powerful determinate of earnings growth you have to be careful with it as the most recent observations are subject to significant revisions.
Given these conditions the stock market downside risks clearly looks larger than the upside potential.
The use of drones against Saudi Arabian oil facilities changes the economic-market risk significantly.
Until now the oil producers have done an excellent job of preventing terrorist attacks from disrupting oil supplies. But the use of drones significantly changes the risk of future oil disruptions. How do we prevent future drone attacks on the choke points in the oil supply line?
I, for one, am surprised that the stock market reaction has been so muted.
Am I wrong in believing that the game has changed?
I have been looking at the data recently to find economic series that would quickly reflect the impact of rising tariffs on the consumer.
One is Retail Sales: GAFO. Think of it as department store type merchandise — goods excluding autos, food and energy. It is reported every month in both the Census retail sales press release and in the BEA measures of retail sales they compile in putting together personal spending and GDP. I have long preferred the BEA data because it provides very detailed measures of retail sales and real growth. Moreover, the practice of some to deflate the Census retail sales data with the CPI overstates retail price increases and under states real sales growth.As the chart shows price changes in GAFO sales moves very closely with prices of consumer goods imports excluding autos, food and fuels.
However, there is a problem with using the price index for imports as a measure of the impact of tariffs. It is a measure of prices FoB, or freight on board. So it does not include tariffs that are added as the merchandise moves through customs. In the current environment importers reaction to tariffs could show up here. One, if China absorbs some of the price increase while consumers would see higher import prices, this measure of import prices would actually fall as it shows prices China receives. Alternatively, if production is shifted to other countries their prices could be higher that the original Chinese price but less than the new Chinese price including the tariff. In this case, this measure of import prices would rise. So we do not know ahead of time how this price index will change.
Just a footnote, GAFO is about a quarter of all retail sales and this measure of consumer imports is also about a quarter of all imports.
There seems to be some confusion about the impact of Census employment of temporary and intermittent employment for the 2020 Census.
The U.S. Bureau of Labor Statistics has a table showing the monthly employment for Special Census workers. You can find it at: BLS – Special Census Workers
The table also has the data from the 1990 and 2000 Census so you can compare what happened in those Censuses to what to expect over the next year. I took the data from Table 1 of total nonfarm employment and subtract the Census employment to create a new series, Total NonFarm Employment excluding Census Temp & Intermittent Employment. The chart shows the last some 20 years of special Census employment. As you can see, this months 27,000 increase hardly shows in the chart compared to what happened in the 2000 and 2010 Censuses or what we can expect over the next year.
For seven years from 2012 to 2018 the monthly payroll employment showed a solid trend of around 200,000 gains each and every month. If it was much above or below this trend, analysts found some excuse to explain the difference and expected the off-trend observation to be quickly reversed. So far this year most analysts continued to act as if this pattern was being repeated.
However, in August the Bureau of labor Statistics (BLS) rebenchmarked the data to more recent Census data. They announced that it would lower reported employment growth but they did not release the revised data until the August employment report last Friday. The new data shows that 2019 payroll employment was significantly weaker than originally reported. The January monthly increase was still around the old 200,000 trend. But in the seven months from February, 2019 to August,2019 the average monthly gain was only 123,000, roughly 60% of the old trend. Moreover, the 12 month moving average fell from 225,000 in January to 165,000 in August and every observation from February to August was below the still declining 12 month moving average.
Seven consecutive months should be enough to clearly demonstrate that trend payroll employment growth has fallen to a new, significantly lower trend than the old 200,000 trend.
Analysts tend to focus on the month over month change so it was understandable that they did not notice that the revised data was showing much more weakness than the old data. Remember,guessing monthly economic releases was a game created by the brokerage house, especially the bond houses, to generate volume because their earnings was much more sensitive to volume changes than other variables.
As of the second quarter the year over year percent change in real GDP is 2.3%. Virtually everyone refers to this as strong. Why? By historic standards 2.3% real GDP growth is subpar. It is below the long term growth rate of the economy using virtually any widely accepted estimate of trend or potential growth. Many republicans actually claim that the potential growth rate is now 4%. If so, it would only make Trump’s 2%-3% growth look worse.
In 1967, real GDP growth was 2.7%, significantly stronger than the current rate. Yet, that was labeled as a GROWTH RECESSION. In Obama’s second term, after the recession and economic recovery, his economic expansion averaged 2.4% growth, or essentially the same growth Trump has experienced during what is actually the same economic expansion. But Obama’s record was almost universally labeled as weak growth and Trump’s as strong. Trump recently bragged that the economic expansion just passed ten years, to become the longest in US history. But seven and a half years of this was under Obama and only two and a half years have been under Trump. Virtually all the data says that current growth is just a continuation of the trends established under Obama. To date Trumps policies have had essentially no impact on economic growth. In this expansion the strongest q/q SAAR was 5.5% in IV 2014 and the strongest y/y growth was 4.0% in first quarter 2015–both under Obama.
I can understand Trump and the Republican propaganda machine calling 2.4% growth weak and 2.3% growth “THE STRONGEST ON RECORD” as Trump repeatedly does.
But why do we let the media and many economist get away with repeating this republican propaganda. Shouldn’t we be calling them out every time they do this, for practicing such sloppy economics.
Note, all growth rates are rounded to one decimal point. Economist quote two decimal points just to prove they have a sense of humor.