Thursday, December 31, 2015

Grading my 2015 forecast: a hit and a miss

 - by New Deal democrat

Here are the bottom line paragraphs from my 2015 forecast one year ago:
This [the Index of Leading Indicators] is pretty straightforwardly showing good growth in the first part of 2015.  Prof. Moore's list of Short Leading Indicators (some of which are the same as the Conference Board's, and which also look forward about 4 to 8 months out, signals the same..... 
... [I]n 2014, a deceleration in housing's contribution to GDP was offset by an increase in governments' contributions at all levels.  Neither Federal nor state and local spending has returned to their pre-recession rates of growth, and at the state and local levels, it is likely there will be further improvement.  Possibly Washington can manage to avoid more own-goals.  If so, those are pluses for growth in 2015, which should continue to offset the impact on the broader economy of the housing slowdown of 2014. 
In summary, when looking at the long leading indicators, all of them are moving in the right direction.  [With a few caveats,] .... it is a safe bet that growth - including jobs and wages - will continue throughout 2015.  Depending on what happens with governments' contributions (as set forth just above), my expectation is for YoY growth in 2015 to be approximately equal to its 2014 levels.  If gas prices remain low, and housing picks up soon enough due to lower interest rates, then this may be the best year of the expansion yet.
I am scoring this as one hit and one miss.

We did manage to escape any negative quarters of GDP:

So far the Atlanta Fed's "GDPNow" estimator is calling for weak but positive growth in Q4 as well.

So I was correct to forecast continued growth this year in both the 6 and 12 month frames.  And jobs and real wages did continue to grow YoY as well:

That's the hit.

But the YoY% change in GDP has declined this year compared with 2014:

Even though housing did pick up as I forecast, and even though government expenditures stopped being a drag, the super-strong US$ clobbered the globally exposed portion of the economy, and just about all of my mid-cycle indicators have peaked and started to decline.  That's the miss.

I always try to learn from my misses, and in this case that has caused me to integrate the US$ into my system as a short leading indicator.

In the next couple of weeks, I will issue my fearless forecast for 2016.  In the meantime, Happy New Year!

Wednesday, December 30, 2015

The 2015 housing market: a final wrap up and a look ahead

 - by New Deal democrat

I have my final post of the year up at, taking a look at how housing sales, prices, and inventory have changed this year, with a preliminary forecast for next year.

Tuesday, December 29, 2015

Do the Underpants Recession Gnomes have a case after all?

 - by New Deal democrat

A couple of months ago, I lampooned what I called the "Underpants Gnomes theory of importing recession," which went like this:

1.  China is undergoing a slowdown
2.  This has spread to China's suppliers, who are undergoing worse downturns.
3.  ??????
4.  This will bring about a U.S. recession 

I concluded that "Until someone comes up with a credible scenario for Step 3, all we have is the Doomer version of the Underpants Gnomes."  Since that time, however, there has been another deflationary pulse in commodities, and another run to new highs (since cooled off a little bit) in the US$.  In short, a renewed surge in the US$ is doing a pretty good imitation of whatever would need to fill in line #3. 

That has caused me to put some further thought into the matter, and to consider modifying my position. The starting point is that, generally speaking, as China in particular becomes an ever larger factor in the global economy, the US feels more of the global effects, in a way it has not done in the last century.  These will presumably become ever more important over time.  It seems natural that the identities and strengths of the various long and short leading indicators should gradually change as well.

With that in mind, let me next make two analogies.

First, the graphic analogy for the global slowdown is this graph from 3 years ago by ECRI:

In this graph, China occupies the middle line, because that is the epicenter of the commodity collapse.  China's "upstream" natural resource suppliers are the bottom line -- they get hit even harder.  The US is the top line, the "downstream" consumer.  While US exports suffer, the US gets cheaper consumer goods in return, more than offsetting the effects of the downturn. While there is a drag on the US economy, the line still points up, albeit at a subdued level.

Second, let's analogize to the Titanic.  The ship had watertight compartments sealed at the bottom, but not the top. She sank because the water overtipped one compartment at a time.  Had the ship's compartments been sealed at the top instead of the bottom, the Titanic would not have sunk.  But its bow would have been very low in the water.  So while it presumably could have limped into New York harbor, it would not have been a good idea to try to do so through a Nor'easter!

The new global deflationary pulse that began in October has caused the slope of all three lines in the ECRI graph to point lower than otherwise - even though the US's line is still positive.  This is  the equivalent to the US economy of causing it to sit lower in the water.  Domestic problems it could otherwise withstand might be enough to cause it to sink.

Let's quantify that a little bit.  Suppose 80% of the US economy is domestic, and 20% is directly exposed to global forces. If the domestic economy is growing 2%, and the globally exposed economy is declining 5%, the overall economy still grows: (.8 x 2%) + (.2 x -5%) = +0.6%.

But suppose the intensity of the globally exposed economy's downturn doubles.  Now we have (.8 x 2%) + (.2 X -10%) = -0.4%.  The overall economy contracts.  

As I wrote last week, the effects of the global slowdown have not entered the US economy through the traditional long leading indicators, but rather directly via coincident indicators like production of steel, and rail, truck, and shipping transport, and generally into sectors of industrial production.  The big harbinger was the surge in the trade weighted US$ in late 2014:

This makes me think that the leading sectors of the US economy, in particular housing and cars, may not have to decline for as long a time, or as much as normal, for such declines to signal an oncoming recession.  In this regard the 2001 recession, which was led by business and did not affect consumer spending very much, is a decent working template:

Housing permits only fell 175,000 at their worst, and vehicle sales declined 2.4 million on an annualized basis. Industrial production declined -2.3% before the onset of the 2001 recession; it is only down -1.3% from their peak now.

It's worth emphasizing, however, that every other long leading indicator did turn over before that recession began, and in particular real money supply and the yield curve have come nowhere near their recession signals at this point, while housing permits after going more or less sideways for 4 months, finally made a new high (ex-NY, the state responsible for the May-June upward distortions) in November.

It is usually wrong to think that "it's different this time," but I have no problem *modifying* the usual rules to take into account the growing secular trend of a more balanced globe.  Thus, *if* I see a decline in housing and cars that is about half of what would in the past have signaled a recession, and at the same time if there is a renewed surge in the US$, I do not think I will wait longer before going on recession patrol. 

Monday, December 28, 2015

Five graphs for 2015: final update

 - by New Deal democrat

At the end of last year, I highlighted 5 graphs to watch in 2015.  Let's look back one last time.

#5.  Mortgage refinancing

After a mini-surge at the end of January (light brown in the graph below) due to low mortgage rates (blue), refinancing applications fell back to their post-recession lows during spring. With a decrease in rates in summer and autumn, there was a small increase, but we are still nowhere near the level of refinancing we saw in 2010 and 2012.  Mortgage News Daily has the graph:   

Over the last 35 years, refinancing debt at lower rates has been an important middle/working class strategy.  There is little room left for that strategy, and it looks like we have seen the low in rates for this expansion -- and possibly for this lifetime!  If the middle class makes more progress in real income, it will have to come from further decreases in consumer prices (if that is possible), or increases in wages.

 #4 Gas prices

Here is a graph of average hourly wages for nonsupervisory employees (red) compared with gas prices (blue) since the bottom in gas prices in  1999 (both series are normed to the same value as of November 2015): 

How long must a worker labor in order to buy a gallon of gas?  After skyrocketing in the lead-up to the Great Recession, gas prices collapsed, helping the consumer start to spend again on other things at the bottom of that recession.  The steep drop in gas prices late last year and again this year took us almost all the way back to that bottom.  In 1986 and 2006, at first consumers saved the money, but once they loosened their pursestrings, the economy responded. Consumer spending, particular on durables like houses and cars, is what is keeping this expansion going.

#3 Part time employment for economic reasons 

 Next is a graph of part time workers for economic reasons expressed as a percentage of the labor force.  This is one of the big positive stories of the year.  Over the last 10 months, this has fallen by about 0.6% or 900,000:

In the longer view, this is  still 1.5% (about 2.25 million) above the boom level of 1999 and about 1.0% (1.5 million) above the level of 2007, but is at least finally close to its 1994 - 2007 range:

#2 Not in Labor Force, but Want a Job Now

This moved generally sideways during the first three quarters, before declini ng sharply in the last 2 months:

It just made a new post-recession low and is about 1.2 million, or 0.8% of the workforce, above its 1999 and 2007 lows. Still, this is only half the way back from its recessionary highs.
 #1 Nominal wage growth  

After 3 poor readings last August, December, and February, YoY growth in nominal wages for nonsupervisory personnel fell  back close to their post-recession lows before rebounding this spring.  It has recently been stagnant at about +2% YoY. .  In the below graph, I have subtracted 2.0% fromYoY nominal wage growth, and 9.9%  from the U6 unemployment rate, to set both to zero at their current levels: 

In the 1990s and 2000s, nominal wage growth started to accelerate when the broad U6 unemployment rate fell to 9.9% and 9.7% respectively.  Last December saw an anomalous big decline in average hourly wages, so it is likely that with the next employment report to be released next week, nominal wages will finally break out significantly above 2% YoY. 

  In summary, this year we made significant improvements in 3 of the 5 metrics, with only slight improvements in two others:  
  • Involuntary part time employment has declined substantially.  
  • Low oil prices have continued to benefit consumers, although the strong US$ has muted their effect on the overall economy.  
  • Wage growth, driven in part by the decline in the broad unemployment rate, has finally shown a pulse, but not much more.
  • In the  last several months, there has finally been a big decrease in the number of people not even in the labor force, but who want a job now.
  • Refinancing is still at low ebb.  For the economic expansion to continue for a substantial time, we must either see a new low in rates (very unlikely), or real wages must continue to grow (at the moment looking likely).
Still,  if current trends continue, we won't achieve real, full employment like 1999 or even  2007 for about another 18 months to 2 years! 

Next week I will detail 5 graphs for the year 2016.  Some of the most critical graphs will change, and some will remain the same.

Saturday, December 26, 2015

Weekly Indicators for December 21 - 25 at

 - by New Deal democrat

My Weekly Indicator post is up at  This week was virtually identical to last week.  The US consumer once again appears to have come through with increased Christmas spending.

Thursday, December 24, 2015

Oil, the US$, and corporate profits

 - by New Deal democrat

Previously this week I have written that the effect of US$ strength has been the biggest economic story of 2015, and that for the last 15 years, the US$ has closely tracked the price of gas.  Because of the increasing importance of international trade to the US economy, the US$ deserves some weighting as a short leading indicator.  Let me conclude with two notes.

First, this is the first time that a big decline in the price of gas has coincided with a surge in the value of the US$.  Let's compare with the two prior occasions.

In 1986, the price of oil precipitously fell by nearly 50% (red), but that was accompanied by a weakening US$ (blue):  

These two tailwinds helped propel the economy to a second round of growth in the late 1980s.

In 2006, there was a smaller (and less lasting!) decline in gas, that again coincided with a weakening US$:

Now here is the last 6 years:

That the price of gas has fallen so much is a real boon to consumers.  In fact both USC Prof. James Hamilton and oil analyst Steve Kopits have shown that whenever crude oil expenditures exceed  4% or more of US GDP, as recession has followed:

That a slow move to 4% would be self-correcting was the origin of my theory about the "Oil choke collar."  But the US produces more oil than it used to, so industrial production in the Oil Patch has suffered.  Still, the collapse in gas prices would still be a significant net positive if the US$ hadn't eaten into exports so much.

Here's a look at the US$ (blue) and exports (iinverted, red): 

While it almost has to be that a hit to exports will take a toll on US domestic corporate profits, the  relationship isn't very strong, as shown in the graphs below:

So there is no reason to think that US corporate profits will automatically continue to suffer so long as the US$ remains strong.  And in another month, the YoY comparisons of the US$ may look much more tame:

Wednesday, December 23, 2015

Real disposable personal income growth: not too shabby

 - by New Deal democrat

This morning's release of personal income and outlays for November pretty much puts the last nail in the coffin for those Doomers who have been claiming we would go into recession in 2015.  Beyond that, "real personal disposable income per capita" is a good enough measure of general middle class well-being that it is the economic metric in Prof. Douglas HIbbs' "Bread and Peace" model of Presidential election outcomes.  Let's take a long-term look.

First, here is real disposable personal income per capita from 1959 - present, in log scale best to show the actual trend:

You can see the big increase was in the 1960-73 boom. The trend moderated from 1974-2006, and appears much flatter since.  Unsurprisingly, this shows that it has been harder and harder for Americans of each successive generation to make progress.

Now let's take a look at the same metric measured YoY.  As of November 2015, the YoY% gain in real disposable personal income per capita was 2.72%, so the graph subtracts that so that equivalent YoY gains show at the "0" line [Note that the big reversal in 2012-13 was due to the temporary 2% decrease in Social Security withholding]:

While the present gains aren't fantastic, they aren't too shabby either.  Outside of the 1960-73 era, the only times that there were sustained significantly better YoY gains were several boom years in the 1980s and late 1990s. I hasten to add that the gains in the last year have primarily been due to the big declines in gas prices, rather than a surge in nominal income.

P.S.:  If current trends continue, Hibb's model forecasts a win for the Democratic Party nominee in next year's Presidential election.

Tuesday, December 22, 2015

Gas prices and the US$ as short leading indicators

 - by New Deal democrat

Yesterday I wrote a post for pointing out that the more international trade increased as a share of the overall US economy, the more important the trade-weighted US$ has become. Specifically, industrial production peaked 5 months after the US$ began to appreciate strongly in July 2014.  By March 2015 things like steel production and transportation had rolled over, and they rolled over further with a further pulse of US$ strengthening several months ago.

While rapid strengthening of the US$ has not always led to recession, it has correlated on a number of occasions, and particularly so where the US$ has appreciated by more than 5% annually, as shown in the graph below: 

That makes me think that the US$ ought to have a place in the index of *short* leading indicators, with a weighting on the order of +/-0.1% in the LEI for every +/-1% change in the trade weighted value of the dollar.  Here is the LEI for the last two years:

and here is the monthly change in the value of the US$, inverted, for the last 5 years:

The US$ would not meaningfully have changed the value of the strong LEI values during the first half of 2014, but would have subtracted -.1 or -.2 in the last half of 2014 into 2015, and again during the 3rd quarter of 2015.  This would correlate well with the relative weakness of the economy in the early part of 2015, and strongly suggests rough patch this winter into next spring.

Another important correlation is that, for the last 25 years, the inverse of the value of the US$ (blue) has increasingly tightly correlated with gas prices (red):

In a sense, this just restates the truism that commodity prices are short leading indicators.  But it highlights the difference in the manner in which those prices (and in particular gas prices) are transmitted into the US domestic economy.  There is less domestic manufacturing, so less of a direct transmission.  Rather, weak commodity prices correlate with a strengthening US$, which in turn transmits weakness via those sectors most exposed to the global economy.

Finally, let's look at gas prices themselves over the last 15 years:

Unless you think that gas prices are going to fall below their 2008 bottom and give up all of their secular increase since 1999, we are much closer to the bottom than the top in gas prices, which strongly suggests that - all else being equal - we should be much closer to the top rather than the bottom in the value of the US$.  Of course the Fed is tightening so all else may not be  equal, but if the US$ is near its peak, then its drag on the LEI is also mainly done.  In other words, the YoY comparison in things like steel production, trucking, and rail should become much less negative, and perhaps turn positive, by spring sometime, unless Fed tightening causes the US$ to continue to strengthen.

Monday, December 21, 2015

The strong US$ has been the big economic story of 2015

 - by New Deal democrat

This post is up at .

It's that time of year when we begin to look back, and look forward.  I plan on posting more on the US$, grading my 2015 outlook from a year ago, a final look at my "5 graphs for 2015," and a first look at 5 graphs for 2016.

Saturday, December 19, 2015

Weekly Indicators for December 14 - 18 at

 - by New Deal democrat

My Weekly Indicator post is up at

The resiliency of the US consumer continues in the face of the global economic hurricane to be amazing.

Thursday, December 17, 2015

November housing report: almost all great news

 - by New Deal democrat

The November housing report overall was excellent, but there is still one nagging open question.

Let's do the good news first.  Except for the June spike, this was the best report since early in the Great Recession:

This, along with November's post-recession record vehicle sales, is the simple but devastating rebuttal to those who claim we are already in a recession. We're not.

Even better, single family house permits did set a post-recession record:

This is pure good news.

Multi-family housing spiked in November as well:

Record rents should be creating demand for more multi-unit housing, and the flatness in this metric for the last 4 months has been puzzling.

Now for the nagging concern:   like most analysts, I have been putting down the spike in June exclusively to expiration of a housing program in New York.  It turns out that only half of the spike can be attributed to New York, as shown in the below graph of total permits (red) vs. pemits ex- NY (blue) [NOTE: graph only goes through October]:

So the decline in permits from July through October can't just be laid at New York's feet. And the state-by-state breakdown in permits won't be reported until next week.

In the meantime, we do have the regional breakdown through November, and here is what permits for all regions ex- the Northeast looks like:

So while I can't signal "all clear" on this most leading part of the US economy until housing permits ex-NY set a new high, we did set a decisive new high in all other regions in November.  Most likely, next week we'll find that is true for everywhere except New York, and then I can declare this month's report  unvarnished great news.

Industrial production: the commodity collapse gets an assist frommother nature

 - by New Deal democrat

I wanted to follow up on yesterday's industrial production numbers.

First of all, here is the series broken down into manufacturing (blue), mining (red), and utilities (green):

As you can see, manufacturing, while unchanged for the month, continued at its highest point since 2007.  The downturn in mining (oil and metals) continues, while the unseasonably mild November weather in much of the nation caused utility production to cliff-dive.

Because 2001 was a business-led recession, where the consumer held up, let's take a look at the same 3 series through that time:

Manufacturing turned down a year before that recession.

Now let's see how overall industrial production fared at the time of the 2001 recession:

Let's compare that with the present downturn, including yesterday's number:

Our current shallow industrial recession is a little more than half of the depth of the downturn that became the 2001 recession, and at the moment the current downturn is much more concentrated in commodities, with an assist last month from global warming.

While the current shallow industrial recession is the biggest threat to the economy since 2009, it isn't yet at a point that makes me think that the economy as a whole is near a recession.  For that, I would expect to see a significant decline in manufacturing, and declines in consumer purchases of houses and cars.  right now, that's not happening.

Wednesday, December 16, 2015

Good news on housing, mixed on industrial production

 - by New Deal democrat

I'm on the road right now, so this will be a brief note without graphs. I'll update later.

Housing can be summarized as follows:

  • permits for single family homes made another post-recession record
  • permits overall had their best motnh except for June
  • the only fly in the ointment is that housing excluding New York (NY being responsible for most of the surge in May and June) is still short of those months, and flat since
  • starts, which are more volatile, and slightly less leading, also had a strong month but have been flat for most of this year.

Industrial production, on par with the last few months, wasn't nearly as bad as the headline suggests:

  • manufacturing was unchanged at a post-recession record
  • mining continued to decline
  • utilities went off a cliff (thank you, global warming!)

More later.

Tuesday, December 15, 2015

What November real retail sales tell us

 - by New Deal democrat

I have a new post up at looking at this metric 4 different ways, including as a harbinger for employment, as a marker for early vs. late cycle expansioin, and as a long leading indicator of recession.

Monday, December 14, 2015

High yield junk bonds are imploding: We're DOOOOMED!!!

 - by New Deal democrat

The market for junk bonds is imploding.  Prices for CCC-rated corporate bonds are down 21% from their peak: 


Oh, wait.  I'm sorry, that was 1998 Asian currency crisis.  It was another 2 years and 9 months after that implosion before a US recession occurred:

This is the current graph of CCC-rated corporate bonds:

They are down 17% from their peak, less than the 1998 carnage.

There were some important differences between 2008 and 1998.  In 2008:

  • the derivates were centered on the lifeblood of the US economy: housing
  • an oil price spike of 100% in 2 years had just occurred
  • the underlying economy was already in contraction
In contrast, in 1998:

  • the issue was centered on a particular corner of the market:  foreign currencies
  • oil was in the process of making a secular bottom
  • the underlying economy was in expansion
While a bond implosion is never to be lightly dismissed, I think it is pretty obvious that our current situation, where the carnage is centered on the Oil patch and other commodities, and the service economy remains in a decent expansion, is more like 1998.

The bottom line is that, while low grade corporate bonds almost always blow out on the cusp of of early stages of a recession, the converse is not true.   You can have a junk bond blowout without triggering or indicating a recession. 

I suspect it won't be over until a dead whale - maybe a good-sized energy producer or utility - washes up on the beach, prompting Fed and/or Treasury action, just as the bankruptcy of Long Term Capital Management did in 1998.  But so long as the consumer keeps buying more houses and cars, and generally spending as measured by real retail sales, I don't see any imminent general problem.

Sunday, December 13, 2015

Weekly US Equity, US Bond Market and International Summary

US Equity

US Bond Market


Forecasting the 2016 election economy: the "Bread and Peace" model

 - by New Deal democrat

This is the latest installment in my series, "Forecasting the 2016 election economy," a real-time experiment to see if I can forecast the outcome of the November 2016 Presidential election by making use of economic indicators up to a year in advance.

We have already seen that a number of economic indicators have a good track record of correlating with the election result, provided we know their values in the first 3 quarters of the election year.  We have also seen that at least one long leading indicator, housing permits, has some validity in forecasting the election day status of changes in the unemployment rate, one of the best such economic indicators. We have seen that 80% of the time, just knowing whether or not the economy is in recession in Q3 of the election year has accurately forecast the popular vote winner in the election, going back over 150 years!   Finally, we have seen that the long leading indicators through Q3 of 2015 suggest that it is more likely than not that this economic expansion will continue through Q3 of next year, and thus favor the election of the Democratic Party nominee.

There is one other well-known model, from economist Douglas Hibbs, called the "Bread and Peace" model.  This model makes use of "real disposable personal income per capita" measured over the entirety of the last Presidential term, with weights for each period prior to the last measurement decreased by 20% (i.e., the last period before the election gets a weighting of 1, the period before that a weighting of 0.8, the period before that a weighting of 0.64, and so on).  From this is subtracted the number of casualties in any wars of choice, with 1% being subtracted for each 100,000 casualties during the Presidential term. The result of this subtraction gives the percentage of the vote that can be expected to go to the incumbent party.

Here is a graph showing how the "Bread and Peace" model has performed since 1952, with its last projection before the 2012 election:

As you can see, the model stumbled somewhat badly in 2012, forecasting that Obama would win only 47% of the vote, when in fact he received about 53%, as shown in this "post mortem" graph below:

This is because "real disposable personal income" was one of the poorest-performing consumer measures of Obama's first term, growing by only 3%  through August, before increaseing another 1.7% in September and October, to be up 4.7% on election day, with much of that increase coming in just the last few months before the election:

This highlights an unusal feature of the model. the last 3 months before the election count for fully half the wight of the entire result. Each successive preceding quarter counts for about half of th subsequent one.  thus if real disposable personal income per capita grew linearly by 10% in the first 3 1/2 year s of a presidency, but did not grow in the lsat 3 momonths before the election, the model projects only +5%
 for this metric.

Since real per capita disposable income almost always grows outside of recessions and their immediate vicinity, this is n accord with our previous discussioin:   a flat - or declining measure right before the election usually  means a recession - which is exactly what the simple model indicating that a 3rd quarter recession in election year predicts the popular vote winner 80% of the time.
So what does the model suggest now?  Let's take a look at 3 Presidential elections for which the model predicted similar results, and did not have a war (such as in 1968) to detract from the numbers.

First, here is 1988:

Next, here is 1996:

Finally, here is 2004:

In all 3 cases, "real disposable personal income per capita" rose fairly linearly throughout the preceding 4 years, with results on election day of +9.5%,  +6.1%, and +7.1%, respectively.

Now here is the 2 years and 10 months of Obama's 2nd term:

Currently "real dispoable personal income is up + 6.4%.

We don't know what it's values will be for the next year.  What we can say is that, *IF* real disposable personal income per capita continues to grow at the average rate it has since the beginning of 2013, it will be approximately +8.6% on election day, and the "Bread and Peace" model will favor a Democratic victory with the nominee receiving somewhere on the order of 53%-54% of the vote.

Of course, this isn't a real forecast, since we won't know the final equation until election day next year.  So we need to see if our leading indicators can help us out.  And it also suggests that we should not rely on one single metric, but rather an index of metrics, to improve outocmes.  As it happens, a British team has done just that with the Index of leading Indicators.  Those will be the subjects of my next posts..  

Saturday, December 12, 2015

Weekly Indicators for December 7 - 11 at

 - by New Deal democrat

My Weekly Indicator post is up at .

Due to the reversal of Thanksgiving Day seasonality, we improved from absolutely horrible to merely bad this week.

Friday, December 11, 2015

New progressive blog aggregator

 - by New Deal democrat

By way of exploring a big increase in the number of reads of this here blog (YAY!!!), I stumbled upon a new progressive blog aggregator, ProgBlog .

The most recent headlines and ledes from probably over 100 progressively-oriented blogs are included in chronological order.  This is a good way to scan for stories of interest in just a minute or two.  It won't substitute for your daily reading of economic blogs, as I think this blog and Calculated Risk are the only two mainly economic blogs included, but well worth adding to your favorites and checking once or twice a day.

Good news and bad news on retail sales

 - by New Deal democrat

This morning's retail sales report can be summarized as follows:

  • +.2% headline
  • +.4% ex-auto
  • +.3% ex-gasolinle

which is something of a reversal of recent months, where auto sales have done the heavy lifting.

Let me get the good news out of the way first. Once the CPI comes out next week, we will probably find out that November set a record.  This is because gas prices account for most of the month to month variability in the CPI.  There is an underlying core inflation rate of between +0.1% and +9,2% each month, so if we take that, as well as the volatility of gas prices, into account, we almost always can identify the direction, and ususally the fluctuation +/-0.2%, of the overall CPI number.

Here's what the last year looks like, including the change in November gas prices:

November CPI is likely to be no higher than unchanged, and could easily decline by -.4%.

Let's apply that to real retail sales (red in the graph below) compared with nominal retail sales, both normed to 100 as of October:

If consumer prices are up by no more than +.1%, we will tie the previous record -- and we are likely to surpass it.

The bad news is that, even so, the above graph suggests that real retail sales are flattening.  This is not uncommon in the 18 months before a recession.  Just another sign that we appear to be later in the cycle.

Thursday, December 10, 2015

Single family housing is outperforming multi-unit housing. And that tells us . . .

 - by New Deal democrat

The first thing it tells us, is that I can write a click-bait headline sending you over to my newest post up at to find out the answer.

Gas prices finally break below last winter's low

 - by New Deal democrat

Last winter gas prices bottomed at $2.02.  For the last 2 weeks, gas prices flirted with, but never broke through, that low.

Until yesterday.  Average US gas prices are now sitting right at the $2.00 mark:

I don't know how much further they may fall. The bottom could be anytime between now and early February.  Since in the last 10 years, the seasonal top and bottom in gas prices has tended to be about $1 apart, in summer I thought the bottom might be at about $1.82.  Here's what I wrote about the summertime peak only being $0.80 above last winter's low back in July:
This tells us that the medium term trend in gas prices, taking out seasonality, is still down.  That suggests that gas prices are going to fall below $2/gallon this winter.
 We'll probably continue below the $2 mark in the next few days, but I doubt we'll make it all the way down to my original forecast low.

But this does show a continued deflationary background to the economy, and a continued slight boost to most consumers' wallets.

Wednesday, December 9, 2015

The Future is Bright . . . or perhaps not

 - by New Deal democrat

Bill McBride a/k/a Calculated Risk has reiterated his case for optimism, in "The Future's So Bright . . ."  While I like and respect Bill, and both of us believe the housing market is crucially important, both of us in important part due to a terrific 2007 paper by Professor Edward Leamer, "Housing IS the business cycle,"  this is one point where I part company with him.  It's not that I am pessimistic. I just do not believe that his argument supports his conclusion.

To show you why, let me take each of his points in order, frequently using his own graphs.

First of all, he cites housing, using the following graph of single-family (blue) and total (red) starts:

Notice the huge bulge in multi-family starts from the beginning of the graph (1968) through the late 1980s, as the Boomer generation hit young adulthood.  Bill focuses on this demographic argument, saying "Demographics and household formation suggests starts will increase to around 1.5 million over the next few years."

But note that even that bulge did not prevent huge downturns in 1970, 1974, and 1980-82.  So there is a secular tailwind -- but turbocharged volatility to both the upside and the downside.

Next, Bill cites growth in state and local government jobs, which are clearly lagging indicators for the economy. The reason is, these follow revenue collection, and revenue collection only starts to fall/rise after the recession/recovery starts:

Next, he cites deficit reduction:

But note when the "peaks," or at least smallest deficits have occurred:  in 1989, 2000, and 2007 - in other words, just before the onset of each recession.  This is a coincident indicator.  That the deficit continues to fall simply means that the expansioin is continuing, and doesn't really tell us anything about the future.

Next, he cites household debt levels.  These have fallen to 35 year lows. but are at levels they were in 1981 when the Fed raised rates and engineered a recession anyway! And while they bottomed in mid-expansion in the 1990s and 2000s, they peaked in 1986 and fell off in the years leading to the 1991 recession:

Bill also cites total household debt:

But notice when this graphic last peaked:  in the 3rd Quarter of 2008!  This is a coincident to slightly lagging indicator.  So I don't see where we can make any useful forecasts based on household debt levels.

Next, Bill cites the architectural billings index.  But this is for commercial construction (blue), which lag residential construction (red):

 Further, the index is current at similar levels to where it was in 2000 and 2007:

So I don't see how it can serve as a useful economic forecasting tool.

Finally, he cites the renewed growth in the prime working age 25 - 54 demographic.  If that were true, then real YoY GDP growth ought to correlate well with YoY population growth in this demographic.  But as shown in the  graph below, which subtacts the YoY% change in this demographic from the YoY% growth in GDP, while the deceleration in growth of the prime working age demographic has generally correlated with a deceleration in real GDP since 1985, the relationship does not hold true at all for the 1965-85 period when the prime working age demographic was growing at an accelerated rate - but real GDP growth was decelerating:

UPDATE:  Here is a graph of the two components broken out separately, so you can see the acceleration of growth in the prime age demographic as the Boomer generation hit (blue), but the simultaneous deceleration of real GDP growth (red):

Bottom line: I am not persuaded by Bill's fundamental analysis, which relies mainly on coincident and even one lagging indicator.   I think there is considerable merit to his demographic argument (but see my caveat above), but I think there are two other long-term trends that will prove more important.

First, the long-term decline in interest rates is almost certainly over.  Interest rates will either go sideways or up from here.  Periodically refinancing debt at lower interest rates has been a vital middle class strategy since the early 1980s, but that well has prbobaly run dry:

as supported by Bill's own graph of mortgage refinancing since 1990:

Secondly, the entry of a large demographic into the labor force tends to depress wages (as did the Boomers between 1974-95).  Even without that headwind, wages have basically stagnated since 2000:

The American middle class will only make progress for the next few decades to the extent that its real income rises - something that, with the exception of the late 1990s tech boom, and the oil price crash of 2008, has been largely elusive for 40 years.  Whether the future is bright or not will depend most of all on how that wage issue plays out.