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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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Is Stephen Moore a Gold Bug?

Is Stephen Moore a Gold Bug?

A lot of the criticisms of putting the twin village idiots known as Herman Cain and Stephen Moore on the FED assert that they are gold bugs. Kate Riga watched CNN when Erin Burnett interviewed Stephen Moore on this allegation:

Stephen Moore tries to flip-flop on the gold standard — but Erin Burnett is prepared and armed with a montage of his past statements

Watch and enjoy! Now Moore did say he would prefer targeting an index of commodity prices, which led me to FRED and its Global Price Index of All Commodities. Moore has not be all that specific how his commodity price target would work but let’s speculate his index would be a lot like this one. Suppose the FED targeted commodity prices to be where they were in 2005 since this index is based where it would equal 100 in 2005. Just imagine how a Moore monetary policy would have worked say during the booming 1990’s. Commodity prices were low so his policy prescription would have been massively expansionary during a booming economy. For much of the period from 2007 to 2014, we would have had a contractionary monetary policy even as U.S. aggregate demand was often incredibly weak. In other words, his commodity price based monetary policy would be about as destabilizing as was monetary policy under the gold standard.

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Economics, the Realm of Money and the Significance of GDP Growth, with an Application to Child Labor

Economics, the Realm of Money and the Significance of GDP Growth, with an Application to Child Labor

What’s economics?  There are two answers.  One is it’s the sphere of human activity encompassing the production and distribution of goods and services, which has sometimes been referred to as provisioning.  This is quite a lot but not everything.  It includes meditation classes but not meditation, making and selling binoculars but not bird-watching, etc.  The problem is that it includes so much of human life that it is barely a delineation at all.  From this perspective farming is part of the economy, and so is shopping for food, cooking the food at home, and even piling some of it on your plate.  It’s a matter of debate whether eating the food should qualify as economic, not to mention the trip to the toilet sometime later.  (I think the answer should be yes to the toilet part.)

Then there’s a much narrower conception that confines itself to just the money economy, things that are produced for sale, paid labor, and money congealed into financial assets and obligations.  This is largely what mainstream economics is about, although it claims to be about human well-being in a much more encompassing sense, using welfarism as a bridge between the empirical world of markets and the putative substrate of “utility”.

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Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

John Harwood reports:

Democratic presidential candidate Elizabeth Warren proposes raising $1 trillion in government revenue from a new tax on profits of the largest corporations. The proposed surtax would prevent Amazon and other companies with profits exceeding $100 million from wiping out their tax liabilities altogether. Instead of taxable corporate income as defined by the IRS, the 7% surtax would apply to profits companies report to their investors.

A lot to like. Look – I hated that 2017 tax scam, which we were told would clean up how corporations are allowed to shield income by all sorts of tricks including transfer pricing manipulation. Alas, its complexity was a boondoggle for shifty tax attorneys rather than simplification and closing loopholes. So proposals to “repeal and replace” this awful tax deform are highly welcomed. But this part of Harwood’s reporting was dreadful:

Warren cited two high-profile examples: Amazon has reported $10 billion in 2018 profits but zero in U.S. corporate taxes; Occidental Petroleum has reported $4.1 billion in profits and also paid zero.

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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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2019 Core CPI

In a low inflation world firms tend to raise prices once a year, typically in the first quarter of the calendar year or their fiscal year.   Because of this very strong seasonal pattern, on a not seasonally adjusted  around 50% of the annual increase in the core CPI —  excluding food and energy — occurs in the first quarter

This very strong pattern gives great insight in to the annual inflation rate. One, is if this year’s first quarter is greater than or less that the prior year’s first quarter, this year’s annual increase will be greater of less than the prior year’s annual increase. This has worked every since year since 1990. Second, just doubling the NSA first quarter rate gives you an amazingly accurate estimate of the annual increase in  the core CPI for that year. In 2018 the first quarter rose 1.20% and the annual increase was 2.16%.  This year the first quarter rose 1.06%.  This implies that the rise in the core CPI should be slightly less in  2019 than  it as in 2018.

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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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