Wednesday, December 13, 2017

US Bond Market Week in Review: The Fed Is Chasing an Inflation Ghost

This is over at

(Special thanks to NDD for getting me on the specter/ghost angle)

The Phantom Menace: Fed rate hikes and non-existent inflation

 - 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

The Ugly Picture of US Wage Growth

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

October JOLTS report: a good post-hurricane rebound

 - 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):

One of my mantras is that hiring leadis firing. To reeiterate, the major shortcoming of this report is that it has only covered one full business cycle. In that cycle, in acord with my mantra, hires peaked and troughed before separations: 

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): 

MonthOpeningsHires   QuitsLayoffs/
9/16 359531582042 H  975
5/17   36403350 1895  922 L
6/17 388232241849  1078
7/17 38973416 1822 1113
8/17 3965 32531888 1127
9/17 3935 3174 1903 1070
10/17 4099 H 3529 H1875  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

The wage - debt deflation dynamic and the next recession

 - 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.

Monday Morning Bond Market Round-Up

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.  

Saturday, December 9, 2017

Weekly Indicators for December 4 - 8 at

- by New Deal democrat
My Weekly Indicators post is up at

The big trend is in the near term forecast, while the general underground movement is in the long term indicators.

Friday, December 8, 2017

November Jobs Report: good month, same caveats

- by New Deal democrat

  • +228,000 jobs added
  • U3 unemployment rate unchanged at 4.1%
  • U6 underemployment rate rose +0.1% from 7.9% to 8.0%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now:  rose +53,000 from 5.175 million to 5.238 million   
  • Part time for economic reasons: rose +48,000 from 4.753 million to 4.801 million
  • Employment/population ratio ages 25-54: rose +0.2% from 78.8% to 79.0%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose +$.0.5 from a downwardly revised $22.19 to $22.24, up +2.4% 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?  
  • Manufacturing jobs rose by +31,000 for an average of  +15,000 a month vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs fell -400 for an average of -15 a month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
September was revised upward by +20,000. October was revised downward by -17,000, for a net change of +3,000.   

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.
  • the average manufacturing workweek was unchanged at 40.9 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +24,000. YoY construction jobs are up +184,000.  
  • temporary jobs increased by +16,300. 
  • the number of people unemployed for 5 weeks or less increased by +121,000 from 2,129,000 to 2,250,000.  The post-recession low was set al,ost two years ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime was unchanged at 3.5 hours.
  • Professional and business employment (generally higher- paying jobs) increased by  +46,000 and  is up +548,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.1%  from 115.4 to  115.5.
  •  the index of aggregate payrolls rose by  0.4%  from 171.1 to 171.7.     
Other news included:           
  • the  alternate jobs number contained  in the more volatile household survey increased by  +183,000  jobs.  This represents an increase of- 1,187,000  jobs YoY vs. 2,071,000 in the establishment survey.      
  • Government jobs rose by 7,000.       
  • the overall  employment to  population ratio for all ages 16 and up fell -0.1% from 60.2% to  60.1 m/m  and is up + 0.3% YoY.         
  • The  labor force participation  rate was unchanged m/m and is also unchanged YoY at 62.7%   

This was a good report on most metrics. Under the headlines, it was slightly weaker than apparent. While the prime age participation rate rose to a new expansion high, measures of underemployment weakened slightly.  

Meanwhile, the revisions were of particular interest. September was initially reported as a loss, the first in 7 years, but is now +38,000. Also, there is a question as to whether we should still take into account the hurricanes, since in the past it has been reported that the aftereffects last more than 2 months.  In this regard, the three month average of +170,000 is in line with the pre-hurricane average.

As usual, wage gains for nonsupervisory workers continue to stink.

So: a good report, doing nothing to alter my opinion that we are late in the expansion, and that the next recession is at grave risk of including actual wage deflation.

From Bonddad

A few points:

The 3, 6, and 12-month moving average of establishment job growth are all about 170.  However, notice that all three area moving sideways for the most of this year.  This tells us the economy will probably continue to print at this level (on average, of course) for the next few months

The 3, 6, and 12-month moving average of goods-producing jobs are all moving higher.  This is good news, but there's a caveat; notice the left-hand scale, which is in the 10,000s.  So 40 is 40,000  Put another way, there just aren't that many jobs in the goods-producing sector of the economy.

The service-producing sector is also growing, but the overall pace is clearly declining, which we also see in the Y/Y percentage change:

Let's turn to a few household report numbers:

The employment/population ratio is still moving higher

But the LFPR is still moving sideways.

Thursday, December 7, 2017

A look at the short leading indicators - December 2017

 - by New Deal democrat

What will the economy look like over the next 3 to 6 months?  I take an updated look over at

Mid-Week Bond Market Round-Up

Declining Inflation Expectations 

The University of Michigan's long-run inflation expectations (top chart) and the 10-year CMT-10 year TIPS rate (bottom) chart are both declining.  The University of Michigan's estimate has always been a bit high; it was 3-3.5% in 2012-2014 and has moved lower to 2.5%.  The bond market measure is lower but probably more accurate.  Either way, both have moved lower by about 50-65 basis points in the last 3-4 years, which has important ramifications for Fed policymakers. 

Yield Curve Flattening

Since the beginning of the year, the curve has definitely flattened, with most of the movement coming in the short-end of the curve.

Your New Richmond Fed Presidebt

And Explanation of the New Bond Market Conondrum

Declining inflation expectations
Declining r*
Decreased expectations for a fiscal stimulus and increased perception of economic and political risk.
Decreased term premium

Wednesday, December 6, 2017

An astute progressive critique of the Trump Administration from ... CNBC?!?

 - by New Deal democrat

John Harwood of that well known lefty outlet, .... ummm, CNBC .... writes this morning that "Trump has Forgotten his 'Forgotten People':"
He forgot them on health care. Jettisoning his campaign pledge to "take care of everybody" regardless of income, he proposed cutting federal health subsidies for the hard-pressed blue-collar voters who put him into office.
He forgot them on financial regulation. Abandoning talk of cracking down on Wall Street executives who "rigged" the economy to hobble the working class, he seeks to undercut the Consumer Financial Protection Bureau .... 
And he forgot them on taxes. Discarding his vow to reshape taxation for average families at the expense of rich people like himself, he's working with Republican leaders to hand the biggest benefits to corporations and the wealthy.
To the contrary, his budget includes big cuts to Social Security disability program. Meanwhile his much-vaunted infrastructure plan has 'failed to materialize."

But, Harwood points out:
The president hasn't forgotten everything. In lieu of big financial benefits, Trump has steadily given "the forgotten people" one visceral commodity[: ]  affirmation of shared racial grievances.
I think this is a good summary of Trump's domestic policies as revealed by the past year.  On social issues, he has governed exactly as he promised during his campaign, issuing a de facto ban on Muslim immigration, unleashing ICE against Latinos, and fulminating against protesting black NFL players. 

But on economic issues he has behaved exactly like a standard issue country club republican.The requirement that the GOP enact a "replacement" for Obamacare? Gone. Preventing the offshoring of manufacturing jobs? Gone. Enacting at least something like a tariff at the borders? Gone. Actually *doing* something about the opioid crisis, which is strongly correlated with areas of economic distress (as opposed to lip service)? Nothing.

On the one hand, the events of the last 40 years have pretty thoroughly disproved the belief of the young Governor Bill Clinton of Arkansas that moving to the center on economic issues would enable democrats to enact progressive social policies. Clinton himself was thrown out of office after his first term, during which he made those remarks to David Broder. To the contrary, for many working class voters social issues are a filter through which a vote-seeker must pass before they will listen on economic issues. Whether intentionally or not, in a strictly partisan sense Trump is behaving in way that is smart (probably a total accident, I know).

On the other hand, Mitch McConnell just gave an interview claiming that the economy will be helped in 2018 by the tax "reform" that is on the verge of being enacted.  But since the average gain to the bottom 80% of households is going to be on the order of $100/year (or $2/week), and since people react much more strongly to the incurring of actual losses (like the loss of the deduction for state taxes, let along what terminating the mandate is going to do to health care costs; and since the decelerating long leading indicators suggest the underlying economy will be weaker at the end of next year compared with its strength now; I suspect events will not unfold next November in accordance with his hopes.

Tuesday, December 5, 2017

ISM Reports Show Broad Economic Strength: Latest Nowcasts are Strong

The latest ISM reports are out and both show broad strenght.  The new orders and production component of the manufacturing report were very strong (up +.6 to 64 and +2.9 to 63.9, respectively).  The anecdotal comments were very bullish:

The service sector numbers were also strong: production +.9 to 62.2.  New orders were off marginally: -.2 to 62.8.  The comments were a bit weaker:

They highlight several areas of concern: Obamacare uncertainty, a somewhat flat oil sector and hurriance issues still hurting some industries.

     Both of these indciate strong future GDP growth, which we also see in the latest Nowcasts from the Atlanta and NY Fed:

Sunday, December 3, 2017

Monday Morning Bond Market Round-Up

The short-end of the corporate market has risen from 1.91% at the beginning of September to 2.34%.  That's a pretty sharp move for shorter-dated debt.

The 3-5 year section of the corporate market has risne from 2.36%-2.76%.  But current levels are still below previous interest rate highs.

The AAA-10-year spread (top chart) and the BBB-10 year spread (bottom chart) are still very tight.

The JNK ETF is consolidating in a triangle pattern

The IEFs (7-10 year treasuries) are trading right around the 200-day EMA.  

My Weekly Columns Are Up At XE

US Economic Week in Review

US Bond Market Week in Review

International Week in Review

Saturday, December 2, 2017

Weekly Indicators for November 27 - December 1 at

 - by New Deal democrat

My Weekly Indicators post is up at

The economy is firing on nearly all cylinders right now. Meanwhile there have been two changes among the long leading indicators.

Friday, December 1, 2017

Extreme measures?

 - by New Deal democrat

Are stock prices at extreme levels?  I take an updated look at the relationship between the long leading indicator of corporate profits, and stock prices.

This post is up at

Where's Waldo, er, I Mean Inflation?

Just a quick note: according to the 3, 6 and 12 month moving average of Y/Y percentage change in total and core PCE price indexes, there is little to no inflation to worry about.

Thursday, November 30, 2017

What Bill McBride says

 - by New Deal democrat

Bill McBride a/k/a Calculated Risk hits the nail on the head:

The current tax cut bill is a[ ] clear policy mistake. 
First, if we look at the business cycle and the deficit, economic theory suggests that the government should increase the deficit during economic downturns, and work down the deficit during expansions.  The economy is currently in the mid-to-late stage of a recovery, so decreasing the deficit makes sense now - not increasing the deficit.
This is particularly so since after ten years, the economy has finally made it back to its long term trendline growth (via WaPo):
For the first time since the end of 2007,  the economy, measured as gross domestic product (GDP), is at its (theoretical) potential.

There is simply no rational excuse for a producer-sided tax cut. The economy is not suffering from a lack of supply. It's one big problem is the lack of real long-term growth in middle, working, and lower class incomes, constraining demand.

Two points of my own:

1. One way I depart from progressive orthodoxy is that I favor a ***COUNTERCYCLICAL*** (have I made that emphatic enough?) balanced budget amendment, mandating surpluses in good economic times (like now), to pay for deficits in hard times like recessions.

2. The GOP's Johnny-one-note "tax cuts for the wealthy are always good!"  orthodoxy -- which by the way means they have no longer believe in the 'Laffer Curve' since that theory agrees that there is a tipping point below which tax cuts do raise total revenues --  means that if a recession hits while they are in power between now and 2020, they will do nothing to alleviate the pain for the vast majority of Americans, If anything, if the "fiscal trigger" survives, mandating budget cuts or tax increases during a recession (when declining tax revenues mean bigger deficits), the pain will actually be intensified.