This is over at XE.com
(Special thanks to NDD for getting me on the specter/ghost angle)
Wednesday, December 13, 2017
- by New Deal democrat
This isn't the first time the Fed has engaged in a rate hiking campaign in the face of somnolent inflation. There were are least three prior episodes.
I take a look at the reaction of the bond market and the economy over at XE.com.
The chart above shows the Y/Y percentage change in the average hourly earnings of nonsupervisory employees. We can break this data down into two sections. Due to higher inflation and stronger unions, the pace of growth was far stronger before the 1980s.
We see a different dynamic at work during the first three post-1982 expansions. Wages decline coming out of the recesssion, falling to ~2% Y/Y percentage growth rate. They then climb during the second half of the expansion, peaking ~4% Y/Y percentage growth rate. This probably explains why the Fed remains thoroughly convinced that the Phillip's Curve is still in play: they're assuing the past is prologue, and with good reason.
However, this expansion we see a different growth dynamic at work. As before, the Y/Y percentage change dropped to 2% a little before the expansion was halfway over. But the pace of growth in the second half of the recovery is far weaker. Hence, we have weaker wage growth.
Here's a graph of the average and median growth rate of wages for each of the expansions:
The pace is clearly declining.
Tuesday, December 12, 2017
- by New Deal democrat
The August and September hurricanes continue to make their impacts felt in the economic data. Yesterday's JOLTS report for October, like the October and November jobs reports, shows a rebound from those impacts. The best way to look at the data is to average the last two months (and this will be true for the next JOLTS report as well, which will be best viewed by averaging all three months).
Let's start as usual by updating the disconnect between the "soft data" of openings in this survey and the "hard data" of actual hires and discharges. As I have pointed out many times, openings can be just chumming the water for resumes, or even laying the groundwork to hire foreign workers. The disconnect betrays an unwillingness to pay new hires more, or to engage in on the job training.
In October. openings continued to run about 10% higher than actual hires:
Hires have been basically flat for the last 2 years -- specifically since December 2015 -- while openings have continued to increase, although they too have been flattish for the last 5 months (especially if we average the last two months):
Further, in the previous cycle, hires stagnated, and shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:
[Note: above graphs show quarterly data to smooth out noise]
Here are hires vs. separations on a monthly basis for the last several years (again, mentally aveerage the last two months). At this point both hires and separations are tracing a similar trend over the last 24 months:
While quits remain at expansionary high levels, involuntary separations bottomed a year ago, and have risen on a quarterly basis ever since. Here's the monthly view of the last several years. The good news is that involuntary separations have fallen in the last several months, even if we average the last two. At the same time, they remain above thei bottom they established a year ago:
Finally, while the JOLTS data is not broken up by states, so it is impossible to know the precise impact of the hurricanes, because the data is broken down by Census Region, we can exclude the Southern Region and see what was going on in the rest of the country, which was not affected. I've prepared that for openings, hires, quits, and layoffs and discharges below (and helpfully marked the expansion highs (low for layoffs) with an "H" (and "L") symbol):
|10/17||4099 H||3529 H||1875||1066|
This is pretty impressive. It shows that outside of the South, both openings and hires are at new highs, and involuntary separations have receded. The only sore spot is quits, which peaked over a year ago, although they have improved compared with earlier this year.
The report yesterday was a good one, but on the other hand, it is very consistent with being late in the cycle.
Monday, December 11, 2017
- by New Deal democrat
One of the important dynamics why recessions end is that inflation decelerates more than wage growth. Thus, for the 90% or so of people who still have jobs, there are some compelling bargains, enough to jumpstart more spending.
That all gets short-circuited if wages actually decline. Then, the fact that debt payments, unlike prices, do not decline, overwhelms the possibility of spending growth. That was one of the most ruinous aspects of the 1929-33 great contraction.
This is why I keep harping every month on the poor wage growth shown in the jobs reports. Here we are, over eight years into the economic expansion, and wage growth is actually declining a little, now at just 2.3% YoY:
This is the smallest wage growth of any expansion since the reports began over half a century ago. Simply put, we are more at risk of another wage deflationary "event" during the next recession, whenever it hits, than at any time since the 1930s.
Let me try to show this in detail.
As already noted, during recessions wage growth declines. What I've done below is to show that for each recession for the last half century, with one alteration: I've recalculated the starting number for peak wage growth during the previous expansion to 2.3%, to match its current rate:
Starting from +2.3%, 4 of the last 7 recession produce a period of wage deflation. The three worst recessions: 1974, 1981, and 2008, produce wage deflations of about a year or more.
But that is just on a YoY basis. When we take a look on a month over month basis, episodes of wage deflation continue off and on all through our current expansion:
And even following shallower recessions like 1991 and 2001, brief episodes of wage deflation occur for several years:
Of course, these charts are strictly hypothetical. The point is that, if actual wage deflation were to occur, because debt payments do not deflate, the dynamic can take on a life of its own, creating a vicious downward spiral, as it did in 1929-32.
Imagine such a deflationary event were to begin to occur in, say, late 2019. Imagine that the makeup of Congress then is similar to what it is now. Now imagine how such a Congress would approach such a deft deflation dynamic.
That is the stuff nightmares are made of.
The Corporate Curve is Also Compressing
The top chart shows the 1-3 year corporate market, which is now near it's highest level for the year. The 3-5 year sector (second from the top) is also rising but is below its yearly high. The 15+ year sector of the market (second from the bottom) is declining. As a result, the corporate yield curve is also compressing (bottom chart).
Treasury Market ETFs Show the Treasury Curve Compression
Charts of the treasury market ETFs show why the yield curve is compressing. The short end of the market is selling off (top chart) the belly of the curve is flat (middle chart) and the long-end of the curve is rallying (bottom chart). As a result:
The yield curve flattens.
Job Growth is Strong Enough to Support Another Hike
The 3, 6, and 12-month averages of payroll job growth area all above 170,000/month, which is strong enough to support another hike from the Fed.
Keep An Eye On Oil
The weekly oil sector chart is right at the 200-week EMA with a rising MACD. So far this expansion, we've been very lucky when it comes to oil prices. However, should they continue rising, we may have a problem.