Sunday, May 28, 2017

US Bond Market Week in Review

     Last week, I discussed the views of 4 Federal Reserve presidents to discern their current interest rate policy.  This week’s column finishes that analysis.  I would like to offer a personal thanks to Minneapolis Federal Reserve president Neel Kashkari who responded to a Twitter question and pointed me to his latest essay on his policy stance.  Not only did it make my weekend, but in showed what a wonderfully powerful tool social media could be.

     In an online essay, Dallas Fed President Kaplan described a fairly healthy economy.  He sees a de-leveraged consumer was the primary driver of GDP growth.  He projects a slight increase in non-residential fixed investment.  Regarding the Fed’s goals, he noted that the U-6 unemployment rate was near its pre-recession low, indicating the labor market is near full employment. 

     And the Dallas Fed’s trimmed mean PCE is just below the Fed’s 2% target:


Here is his statement on monetary policy:

Based on these considerations, I have argued that future removals of accommodation should be done in a gradual and patient manner. In that regard, I continue to believe that three rate increases for 2017, including the March increase, is an appropriate baseline case for the near-term path of the federal funds rate. 

     Chicago Fed President Evans also believes the economy is near the Fed’s unemployment and inflation targets.  Consumer spending has been strong thanks to healthy balance sheets and strong job growth.  Business investment has been weak, but the strong dollar has lowered international demand (and therefore the need for domestic investment) while weaker oil prices have hampered the oil industry.  He also made a very interesting point: because we’re in a slower growth environment, the pace of rate hikes will be slower.  Put another way, slow growth means weaker prices pressures which implies a weaker pace of rate increases.  Here is his statement on the pace of rate increases:n

I think the progress made toward the FOMC’s dual mandate goals justifies our recent rate increases, and my current outlook envisions the fed funds rate moving up over the next few years along a path roughly consistent with the median FOMC projection.

     Philadelphia Fed President Harker sees three rate hikes this year.  He sees the following labor market situation: “The unemployment rate has dropped to its lowest point in a decade, quits are up, and we’re starting to see upward pressure on wages. I estimate 2.5 to 3 percent wage growth this year, which is good. It’s what has been missing from this recovery.”  He also believes inflation is already near the Fed’s target.  Here is his statement on monetary policy:

First and foremost, based on the strong economic outlook, I continue to see three rate hikes for 2017 as appropriate. That, as ever, is assuming that things unfold in line with my projections.

     NY Fed President is also on the record for 2 more rate hikes:

The Fed has penciled in two more rate hikes this year and Fischer said Friday this remains his forecast.

“So far, I haven’t seen anything to change that,” he said.

He stressed the Fed is “not tied” to a total of three rate hikes this year and the actual pace of tightening depends on the data.

     The lone dissenter from recent rate hike talks is Neel Kashkari of the Minneapolis Fed. He offered his reasoning in a recent essay.  First of all, he notes that most Fed governors are treating the 2% inflation target as a ceiling rather and the median estimate of prices.  He offered the following analogy:

For example, if you are driving down the highway alongside a cliff, you will err by steering away from the cliff, because even one error in the other direction will cause you to fly over the cliff. In a monetary policy context, I believe the FOMC is doing the same thing: Based on our actions rather than our words, we are treating 2 percent as a ceiling rather than a target. I am not necessarily opposed to having an inflation ceiling. The European Central Bank has a 2 percent ceiling instead of a symmetric target. However, I am opposed to stating we have a target but then behaving as though it were a ceiling.

This is a very important point, which I believe to be largely correct.  He also noted that other inflation measures – specifically expectations and labor costs -- are also contained.  And unlike other Fed governors, he believe there is sufficient labor market slack to warrant maintaining the current rate policy.  Here, he cites the employment to population’s ratio as evidence:

He also references the still high U-6 rate for support (however, see Dallas President Kaplan’s analysis above).  Overall, I would expect Kashkari to continue being the lone dissenter.

     A large majority of Fed governors are in the hawkish camp now.  Unless there is a fundamental change in the economy, expect at least 2 more rate hikes this year.

US Equity and Economic Review

     On Friday, the BEA released their second estimate of 1Q GDP.  This was better, with a 1.2% Q/Q growth rate and 2% Y/Y increased.  Best of all, PCEs, investment and exports all posted Y/Y gains:

While the overall growth rate is still disappointing, first quarter GDP growth has been subject to a strong seasonality for most of this expansion, so there’s not a lot of reason to worry yet. 

     Durable goods were up slightly, but continued to print in the 220,000 – 240,000 range:

     Finally, this week, we learned more about the U.S. housing market.  Existing home sales fell 2.3% M/M but rose 1.6% Y/Y.  However, the 3, 6 and 12 month average annual pace of existing sales is still rising:

 New Home sales declined a large 11.4%, but were up .5% Y/Y:

The chart shows that large drops are rare, but not unprecedented.  There have been 4 such declines in the last 5 years.  Regional data highlights the weak areas:

In both charts, the red line represents the region with the sharpest decline.  In the top chart it’s the Midwest region while in the bottom chart, it’s the West region.  But as with existing home sales, the 3, 6 and 12 month average annual pace of sales growth is increasing:

Mortgage rates aren’t the culprit:

While both 15 and 30 year mortgages rose after the election, current levels are still low by comparison to other times in this expansion.

      Economic Conclusion: overall, the U.S. economy is still in good shape.  While 1Q growth was 
still slow, the second estimate did contain an increase.  Durable good sales are still within the 220,000-240,000 range, indicating that while orders are not increasing, they are at least being sustained.  Although the monthly housing market data was weaker than we’d want, the trends are still positive. 

    Market Analysis: The good news this week is the SPYs finally broke through the upper 230s, which had provided resistance since the beginning of March:

The MACD indicates there is additional upside momentum if the market wants to continue rallying.  The problem is the small and midcap indexes failed to confirm the rally:

 This is not fatal; it could simply be that these indexes will move higher in the next few weeks.  But also consider that 3 of the 4 leading industry sectors are defensive:

Health care, consumer staples and utilities sectors are leading the market higher. 

     Despite the small SPY rally, the market is still expensive, with both the current and forward PEs high.  As I’ve concluded for the last few years, we need continued earnings and economic growth for the market to continue meaningfully higher. 


International Economic Week in Review

     Let’s delve into the country specific data.

     The Bank of Canada maintained their current .5% interest rate policy this week, offering the following assessment of the Canadian economy:

The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment. Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions. Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets. Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges. The Bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.

OPEC’s decision to increase oil production had a strong negative impact on western Canada, which had seen a boom of tar sands related activity.  But according to the central bank, the adjustment is now over.  They also describe a standard series of economic cause and effect events, starting with a declining unemployment rate:

The jobless rate dropped from 7.3% at the beginning of 2016 to its current level of 6.5%.  This has increased consumer confidence, which translates into higher consumer spending:

Y/Y retail sales increase have risen from 1% in 2015 to their current strong pace of just under 7%.  And the other half of the economic equation – businesses – are also increasing their activity:

The top chart shows the Canadian PMI index, which has risen strongly since the beginning of 2016.  This has translated into strong gains in industrial production, as shown in the second chart.

The combination of these developments has led to an increase in Canadian GDP:

The above data indicates that Canada has recovered nicely from oil’s price drop.

     The ONS released the 1st revision to the UK’s 1Q GDP report.  Overall GDP increased .2% from the previous quarter:

This is one of the weakest readings for from the UK since 2012. Moreover, the Q/Q number has weakened in the last 9 quarterly reports.  This is translating into a slightly lower Y/Y growth rate:

 Here is a breakdown of report’s component parts:

 This quarter, investments (in grey) was a large driver, which has greatly offset by a large decline in exports (in yellow).  It’s natural to ask if the post-Brexit slowdown predicted by a number of economists and analysts is now here.  We’ll need at least another quarter of data to make that determination.

           The only news from the EU was the latest Markit numbers: manufacturing rose to a 6-year high of 58.4; services marginally decreased .2 to 56.2; the overall number was unchanged at 56.8.  But the report contained this very positiveanalysis:

With backlogs of work across the two sectors registering the second-largest rise in six years, firms again took on staff at a pace rarely seen in the survey’s history in order to expand operating capacity. The overall rise in employment was the second-largest since August 2007, with manufacturing adding jobs at the steepest rate in the survey’s 20-year history. Service sector job gains matched those seen in April, sustaining the best spell of employment growth that the tertiary sector has enjoyed since early-2008.

In recent public commentary, the ECB noted a very important feedback loop was occurring: job gains were increasing consumer confidence which, in turn, was supporting increased consumer spending.  Here is the data:

The top chart is the EU unemployment rate, which has consistently decreased for the last 4 years.  That has supported retail sales (bottom chart), which have steadily increased over the same period of time.

     Finally, there were two pieces of economic data from Japan.  The market number decreased marginally, falling .2 to 52.  And prices remain weak: overall, they increased .4 while core prices were unchanged.

A thought for Sunday: no, Trump approval *still* isn't imploding. BUT ...

 - by New Deal democrat

Democrats continue to delude themselves about Presidential approval polls -- with one very big possible exception.

In the first place, can we all agree that Trump has had a particularly nasty last several weeks? Including firing Comey, blabbing secrets to the Russian ambassador, blabbing about our submarines to the Philippines' now-dictator, compromising the intelligence sources of Israel (and then confirming it!) and later Britain, and reports of multiple occasions with multiple officials in which he blatantly appeared to be attempting to shut down a criminal investigation?

Can you imagine what the public opinion polling would look like after several weeks like that, for virtually any past US President, let alone if the president were Hillary Clinton?

Well, here is what Trump's looks like as of today:  

His approval stands at 41%, right in the middle of where it has been since he assumed office in January.

A variation of the Trump-support-is-imploding mantra showed up later in the week when FiveThirtyEight wrote that "Trump's Base is Shrinking" based on strong vs. weak approval. Typically this is the graph that was shown:

This was contrasted with the strong vs. weak disapproval graph from the Vox article:

But once again, this looks like Democrat  self-delusion.  Here's Rasmussen's graph of strong approval minus disapproval graph so far for Trump: 

The FiveThirtyEight article was published at the passing moment when trong disapproval was slightly more than twice as common as strong approval. Now the level is back to where it has been on average for the last two months.

Here's the second big problem: the metric, which has only been published since 2008, was far wide of the mark in the 2012 election where, despite a negative number, Obama handily won re-election. (Since both 2008 and 2016 did not involve incumbents, the metric really didn't apply there at all.):

Democrats really need to disabuse themselves about any notion that Trump's support is imploding in any meaningful way, at least as to he himself. In presidential elections, even those who somewhat approve or disapprove tend to vote.


But there is one potential jewel in the detritus of the data: the difference between strong approval and strong disapproval may be a K.I.S.S. way to forecast the midterm Congressional elections.

Why? Because in midterms, only those with strong enough motivations come out to vote -- and the strength of their opinions looks like a pretty good proxy for their motivation.
In other words, what this is telling us is that if the midterms were to take place with a net disapproval rating on par with that found by FiveThirtyEight, there would probably be a Democratic wave. So it will be worthwhile to check strong approval vs. disapproval from time to time, to see how well it forecasts the 2018 midterm election results.

Saturday, May 27, 2017

Weekly Indicators for May 22 - 26 at

 - by New Deal democrat

My Weekly Indicators post is up at

The easiest, quick and dirty way to gauge the near term outlook for the economy is to look at stock prices and jobless claims. This week the former made a new record high, and the four week average of the latter a new 40 year low, so that part is easy!

Thursday, May 25, 2017

ZOMG! Housing plunges in April !!!

- by New Deal democrat

If you were distracted by the clickbait Doomer headlines, you missed the important story.

This post is up over at

Wednesday, May 24, 2017

John Hinderaker -- Still Economically Dumber Than a Post

Hinderaker hasn't written much about economics lately.  This is fortunate, considering he and his Powerline cohorts spent the better part of an entire year being wrong about even the most basic economic point.

But he's back, just as wrong as ever.  Now he's defending the economic projections in Trump's budget:

With reasonable government policies, 3% growth is eminently obtainable. It is nowhere near what the Reagan administration achieved. Which is why the Democrats are determined to drive Trump out of office before his pro-growth policies (on repatriation, for example) can be implemented. A pro-growth administration would expose the Obama years for the economic fiasco that they were.

Ah ... no.  I'll let Federal Reserve President Kaplan explain:

The net impact of this aging trend has been, and is likely to be in the future, a reduction in the rate of labor force growth. You can see from the chart (below) that, beginning in the 2000s, population growth among those 20 to 64 years old has outpaced overall labor force growth. This trend has been due to a steadily increasing percentage of the 55–64 population within the 20–64 age range as well as a slowdown in the rate at which women have been entering the workforce. Dallas Fed economists expect these trends to continue as we head toward the 2020s.

Because GDP growth is comprised of growth in the workforce plus gains in productivity, weaker expected workforce growth trends will likely have significant negative implications for potential GDP growth in the years ahead—unless we take steps to mitigate these effects. 

In other words, because the US population is aging growth is slowing.  That's an economic truism.

Of course, Hinderaker could care less how things actually work.  The last few months have conclusively shown that he places party above country.

Tuesday, May 23, 2017

Marginalized populations and employment during expansions

 - by New Deal democrat

Dean Baker ran a graph over the weekend showing an apparent conundrum: namely, that in the last several years there has been an increase in the percentage of those employed who only have a high school diploma vs. a slight *decrease* in employment among those with a college degree.  Here's his graph:

This caught my attention, because I actually don't think this is such an anomaly.  So I went back and checked.

The data posted by Prof. Baker has only been published since 1992, so we don't have a long track record.  But it is interesting to note that a similar pattern asserted itself in the 1990s.  Take a look:

As the economy began to take off - in particular beginning in 1994 -  the e/p ratio of college graduates actually declined by about 1%, while the employment rate of persons with only a high school diploma increased.

Here is another look at the same data, showing the amount by which the e/p ratio for those with college degrees has historically exceeded those with only high school diplomas:

This is part of a broader picture. We get the same pattern when we compare U6 underemployment with U3 unemployment, as in the below graph which shows the amount by which U6 has historically exceeded U3:

Another marginalized group is African Americans, and here, we have longer data, going back to 1972. The below graph shows the amount by which black unemployment has historically exceeded white unemployment:

It's the same pattern.  As the economy improves during an expansion, more and more marginal, and marginalized, potential employees find work.

These same groups typically are first to feel a downturn, so the fact that the data in Prof. Baker's graph hasn't started to reverse is good news.