Wednesday, January 25, 2017
Those Whom The Gods Wish To Destroy ...
(Note: this post, and probably several others to follow, are actually about the US dollar and relative currency trends. If you have the patience, at the end it may be worthwhile. Because, when you come down to it, the value of the dollar will be determined by the economy, and right now the economy is determined by politics. Political initiatives are going to determine Real Gross Private Domestic Investment. Which is and has been the problem with this recovery:
The other view - percent change YoY:
The Trump candidacy and presidency will be about trying to fend off the next recession, which pretty much was baked in the US economic cake. )
The amazing thing about Donald Trump's victory is not that it happened - he was a shoo-in, given the failure of the Republican AND Democratic leadership to maintain touch with the voters, a declining economy, and additionally, the Democrats' irresponsibility in nominating a deeply ethically flawed candidate.
Now I can imagine that Democrats don't want to debate out loud whether they could have won this one if they weren't running a crook who had already flouted laws as Secretary of State and appeared to have sold influence as Secretary of State. The natural assumption would be "Yes", but is it true? I don't know the answer. I suspect they wouldn't have, due to the economic issues.
I have been looking for good reporting from a Democratic slant on this election, and this article (from NPR) is about the best. I saw hints in the article that the debate over the bad candidate/bad message question is occurring:
Onyeukwu, like the Democrats in the Mahoning Valley, also thinks the party needs to focus more on the economy. He points out that's how a man named Barack Hussein Obama won Ohio — twice. ...
"Hillary's not the problem," said Samuel, the labor organizer. "The democratic process is the problem. And, making sure people feel included." Samuel said the Democratic Party doesn't seem to understand its audience. And for Onyeukwu, that audience includes many people of color. So he wants a party that also continues to push for more progressive policies on race.I'd recommend reading the article. What more progressive policies on race might be, I don't know. Earlier, the observation that an economic focus is not exclusive of social policy was made:
And yet others insist that economics and race are not mutually exclusive choices, that it is possible to focus on both simultaneously. Figuring out that balance is going to be central to the party's survival, as it currently wanders in the political wilderness.The Dems may be out of political power now, but I think wandering in the wilderness is up to them.
The problem seems to be more that they are wandering in the urban areas, and have forgotten about the vastness of the flyover territory in the US, demonstrated by the 2016 presidential county map:
Overall Trump won approximately 2,600 counties to Clinton’s 500, or about 84% of the geographic United States. However, Clinton won 88 of of the 100 largest counties (including Washington D.C.).Oops. The significance of the geographical distribution is that you might shift a few counties back by concentrating on them, but will you get back the Senate? Can you fight back and win the House? If not, the best the Dems could achieve would be a presidential stymie. Voters have voted for that before!
In 2016, surprisingly, they rejected it - or rather, the voters evaded that problem by electing a Republican candidate who is really an old-fashioned Democrat. The electorate is and has been moderate, and so they put Trump in there to defend their interests. They wanted economic growth and protection for the average citizen against vested interests. They wanted JFK. Trump was as close as they could get.
It seems clear to me that the essential political issue for the Democrats is entirely whether they can recover enough of a geographic base in 2018 to become policy players nationally. I write this because money seems to be very important in Democratic campaigns (it was unimportant in Trump's presidential run - he spent way less and won). But Dems have been playing the demographic-segment for so long that they need a media splash to get people to turn out. And - if Dems aren't able to convince donors that they can deliver, donors are not going to cough up in the same way.
Unless Democrats can shift to a bottom-up policy generation for 2018, they will be losers again - the problem with having such a strong but geographically limited base is that unless the interests of that base are general, your congressional leadership is not going to be helping the party regain ground. It's likely to help the party lose ground. That's why they have to develop a DNC that basically polls locals and asks them what they need and where they want to go.
The above doesn't fit well with special-interest politics centered on groups. The Dems already know that, which is why they are going after women. It did not work in 2016. In 2018, perhaps they can leverage it a bit more.
But for this putative DNC-reboot, trying to build a 2018 base capable of electoral success can't be done in isolation - they have to deal with the other players. In my next post, I'll try to list the major players at the table.
I would appreciate your input!
Saturday, January 21, 2017
The NYT and Ahistoricism
My instinct, looking at the headline, was "This is going to be rich - because clearly the NYT crew have not understood an awful lot about America, which is why Trump's election came as such a shock to them."
It turns out that industrial production in 2016 was below the level of 2007. It had briefly, oh so briefly, recovered to just above its pre-recession peak, but that was in 2014. In 2015 industrial production began a new decline, and by the time Election Day 2016 had rolled around, the US had been in an industrial recession for well more than a year.
One might hazard that the "Rust Belt" (that's a hint, NYT people - that's a clue!!) might have been particularly receptive to Candidate Trump's discussion of the country's decline due to the facts that
A) They were experiencing another industrial recession of the type that preceded the 2007 Late Great Economic Unpleasantness, andHad Madame Secretary The Most Brilliant Person Ever Former First Lady Hillary Rodham Clinton The Most Qualified Candidate Ever to Run for President Most Glorious and Esteemed Glass Ceiling Breaker and Not Even Indicted (to give her her full title) seen fit to run a campaign that noticed this minor detail of American life, perhaps the outcome would have been different. But no, instead the puzzling lack of enthusiasm for the Obama Economy Victory Tour that her campaign was pushing was blamed on racism, sexism, and homophobia. (Nothing causes a bitter clinging to homophobia like not just having the local factory shut down, but then having the plant itself demolished so that the property taxes won't be paid.)
B) The other candidates, including the Oh So Esteemed And Worthy Mrs. Clinton, had all failed to notice this occurrence.
Note that when Obama ran in 2012, industrial production was improving AND HE CAMPAIGNED WITH THAT MESSAGE. He took credit for it and said that this recovery was and would be an American priority. This might explain why racism suddenly reared its ugly head in rejecting a white candidate in areas in which four years prior, a black candidate had succeeded.
More economic resilience graphs (NYT crew has all the words, I just have the facts):
That's the difference between the Reagan recovery and the Obama recovery, and those bitter racist homophobic sexist clingers in the Rust Belt live it.
Cause and Consequence (I'm the Jane Austen of economic bloggers):
That's not because of an aging population - that's the 25-54 employment/population ratio. Yes, welfare dependence has skyrocketed. It had to do so.
Which causes consequences:
Skyrocketing public debt in relation to GDP. The trajectory doesn't look better if you look at federal debt held by the public, but what the heck - I am not being polemical here:
Some might call this carnage.
Some might call the news that the US death rate (age-adjusted) is rising "carnage". Some might even wonder why having more of the population covered under the glorious Obamacare social progress results in:
Most of the retreat in life expectancy came from increases in deaths from heart disease, chronic lower respiratory diseases, unintentional injuries, stroke, Alzheimer's disease, diabetes, kidney disease, and suicide, according to the CDC.A rise in deaths from chronic illness when we supposedly have increased access to healthcare across the population? Wouldn't that mean that the population LOST access to health care? It's almost as if, for no possible reason, the access to rescue medication like the EpiPen and higher-end inhalables like Advair diminished? As if many generic medications now cost 5-10 times what they did five years ago? As if the combination of $6,000 deductibles and a legal monopoly granted to insurance companies somehow reduced access to health care? How could that be, with all the social advances made in our glorious republic?
But don't worry, the NYT is not going to travel that lonesome road by asking a question like that. It's entirely politically incorrect, isn't it? We must be politically correct even if it is killing those bitter clingers in those rural counties.
One suspects that those rural counties felt a tiny surge of hope when President Trump told them in his inaugural address that they would no longer be forgotten. One suspects that a manufacturing resurgence would really help Detroit. But it is politically incorrect to say that out loud, isn't it?
Wednesday, November 09, 2016
Non Nobis Domine
I had decided my time would be better spent in prayer than blogging; my conscience tells me that we were graced in a time of difficult choice.
Not a time for boasting or wrath. I think that Thiel expressed it best:
Peter Thiel, the Facebook director and venture capitalist who struck a contrary chord in this liberal stronghold by backing Donald Trump, congratulated Trump's surprise win of the U.S. presidential election by saying "we're going to need all hands on deck."
"He has an awesomely difficult task, since it is long past time for us to face up to our country's problems," he said in a statement to USA TODAY
Friday, June 03, 2016
I Told You So
The monthly employment report could not be worse, and will rebound next month, but only to very disappointing levels. One of the special factors causing the "shock" factor in this report are probably Texas floods, with manufacturing and transportation delays. But a great deal of it cannot be blamed on special factors. The Verizon strike doesn't have anything to do with it.
There is strong agreement for May between the Household and Establishment surveys. Household is +26,000 jobs; Establishment is +38,000/25,000 private.
According to Household Table A-8, non-ag part-time workers for economic reasons rose by almost 500,000.
All of this really shouldn't shock anybody, but it will be reported and felt as shocking. There were significant downward revisions to prior months in the Establishment survey. The unemployment rate fell to 4.7% because of participation changes, with the month-to-month Not In Labor Force total rising 664,000. Participation rates have been falling for a couple of months. In March it was calculated at 63.0; this month it is 62.6 - lower than May 2015.
What is happening is that services are slowly downturning to follow manufacturing. Manufacturing is not pulling out at all.
Temporary help services was quite negative at -21,000. Generally this doesn't predict strong performance over the next few months.
Rail intermodal has been highly negative for several months. The CMI business to business credit survey (see page 6; look at the graph) shows that services are following manufacturing, with some more to go.
The June rate hike (snicker) is off the table. It always was.
The collapse in the worst-of-the-worst subprime auto issues has a little to do with this, but the basic problem is that the growth impetuses are all slowly fading. Inventory pile-ups have been forecasting this for quite some time.
Nothing I am seeing in any reports changes my assessment. We are in the first stages of a European-style business-led recession. It will be long and slow.
More about drivers whenever I have the time. In the meantime, from a political perspective, it ought to be obvious that the advantage is to the candidate talking about JOBS JOBS JOBS instead of the candidate talking about continuing current policies.
UPDATE: The May service sector reports are out, confirming my comment that the mechanism here is a slowing in services. Markit. ISM.
Friday, May 06, 2016
Employment Report, April
The two-month (Feb to April) Household number is +70K, for an average +35K per month.
Establishment is showing a much better number for those two months at +184K per month. There were downward revisions to the previous two months totaling -19K.
I do think the Household Survey picks up trend shifts (both positive and negative) earlier than the Establishment Survey. Adjusting for the higher error ratio in the Household gives an unreconcilable -50K per month, so I would hazard that in the future the Establishment Survey will be revised down. The Employment/Population ratio dropped from 59.9 to 59.7 in Household.
Looking at Table A-8, it appears to me that some of the big Household Survey swing is actually due to weather- and calendar-induced SA perturbations. So I do not foresee a sudden drop-off in employment in the near future, although I think employment weakness will slowly become more obvious by July.
I am not surprised by the weakness, because FUTA has been forecasting it.
I still believe that the US entered recession in March. I still believe, however, that the US economy has been Europeanized to the extent that this one will have a European-style trajectory - very slow and long.
April rail figures for intermodal freight were notably poor:
The air is slowly leaking out of this expansion, and I really don't see what will redress it. There is time, but barring sudden fiscal stimulus, the weakness will continue to very slowly drag down the economy.
Looking at grocery stores, it appears to me that a price correction is underway. I expect the inflation rate to begin dropping sharply. This may help on the consumer side.
Both auto and housing sales are showing clear signs of weakening trends over the last few months. These trends have not yet impaired production, but when they do later in the year (or whenever managements begin to cut spending), we will see more traditional recession signs.
This is still a business-led downturn, and those do not have a sudden effect on employment. Inventories are too high, still. This is not going to rebalance on its own.
The dollar is weakening in response to recent data, but global growth trends are not very strong, and it will be hard for US manufacturing to pick up on export orders even with a weaker dollar.
Addendum & Note:
The theory that the strong employment of the last few years is enough to keep us from a consumer participation in a weak business cycle is rather stupid. If one looks at the longer term, this has been a stunningly poor expansion in terms of jobs:
The population has grown but full-time jobs are only a few million more than they were before the previous recession. There is literally not enough in the system to support housing values and rents; there is a limit to what credit can accomplish.
People are running up their credit cards again, but this has a natural end:
Friday, April 15, 2016
We Are Not In The Mood For This.
Many Who Know claim that first quarter growth will not reflect the real health of our economy. Which is very vibrant and thrilling. Or something like that.
The NY Fed is going to get in the GDP forecasting game. But unlike Atlanta, they are going to modelize it, rather than depending on that irritating data. It's a model on top of data. Since they have already been publishing GDP models on Liberty Street, I don't understand what is so different?
But anyway, here is the link to the new " FRBNY Nowcast". As of this morning, 0.8 Q1 & 1.2 Q2.
Note for non-US persons reading this blog:
1) All US GDP numbers are always annualized.
2) No Fed bank ever forecasts recessions. It's an unwritten rule. Thus this is as close to a recession forecast as you are ever going to see from a Fed source.
3) The basic US annualized quarterly GDP error range is slightly more than one percent.
Admittedly, March was crappy:
The crappiness hardly began in March. Really, folks. So retail joined in the party, a bit. That in a March that included Easter? Hah, it will be revised up. There will be sales in the last week. But still, this is not a growing economy.
Of course, there is always April:
But now it is not just carloads joining the pity party. Intermodal has joined in.
April is the cruelest month? One suspects not, because of this:
That was February. Inventory to sales ratios can't keep rising forever (although they do contribute to GDP). Since March retail sales weren't very good, one can presume that we have additional adjustments ahead.
Since rail is lower, it ain't over. The trucking gauge has been running way better than rail, but look at the petroleum report. Four-week product supplied for distillate fuel oil is down 7% YoY. At this time of year, that's mostly trucking.
NFIB - ah, yes, the small business report. In March's version, the "R" word appeared in a dispirited manner:
For a broader perspective, the Index has turned decidedly “south” over the last 15 months falling from a reading of 100 in December 2014 to 92.8. A “chartist” looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal. The April survey will decide whether or not the alarm should be rung. This month’s change was not statistically significant, just not in a positive direction.This is what he's talking about:
It should be noted (you may read the report on the website) that small business hiring appears past peak,
small business openings look to be stalled or past peak,
and, you know, there's perhaps not much more there:
If you read the link to the pdf of the report and go through the earnings/sales/sales expectations, particularly the last on the bottom of page 9, you'll see that vibrant hiring is unlikely. Price cutting in small firms often precedes a recession:
You may imagine how thrilled they are with the campaign for a $15 hour minimum wage. When the law forces you to pay your workers more than you are earning, hiring preferences ratchet down.
April is the next "large" survey. I expect it to be slightly better. I think this is just going to ooze along, but not upwards. Ooze tends to follow gravity's pull.
Missing a recession bar, but you get the idea from looking at this long term Industrial Production graph:
Note: In case you weren't getting it, Industrial Capacity Utilization (missing a recession bar):
Tuesday, April 05, 2016
Comments, Possibly Ill-Advised.
What I am looking at as confirmation of this are the Treasury tax receipts:
Note that withheld income and employment taxes are saying that income from employment is down YOY for March. That generally doesn't even happen in a recession! But low inflation probably has something to do with it. These figures were reliably predicted by the FUTA (FUT, Federal Unemployment Tax) change in direction months earlier. As noted before, we started out this fiscal year (Octover, November, December) with a fine YoY increase on this indicator.
Corporation Income Taxes are improving a bit, although still negative YoY. But this must have been achieved by cutting costs.
The situation is not temporary, because FUT is predicting a FURTHER drop.
March's auto sales were disappointing, although auto production figures in Q1 were very good. The daily sales rate was in fact the lowest since last Feb 2015. But I presume the problems with some of the subprime auto loan ABS have something to do with the rather sudden March sales drop - lending needs to tighten from last year. Auto sales aren't going to help us that much YoY going further. I bet we'll end up the year a few percentage points down from 2015, mostly on subprime loans, which were holding up fine in summer of last year, but started to implode at the end of 2015. The oil patch is accounting for a lot of this so far, but on the other hand the sales share of subprime loans also reached an extreme high last year. You can only dig so far before hitting the sewer line. They found it. They will be getting out of that hole as quickly as possible.
Housing - eh. Purchase money apps are way up; sales are disappointing. There appears to be an affordability issue in many areas. It's not going as well as expected. Construction should still be decent through July/August, though. There are plenty of apartment buildings still in the works. But the YoY increase, currently up there in the 10 percent region, is going to fade out there as well.
The federal government is coming up with increasingly creative proposals to convince banks to lend to borrowers who really can't afford their home and borrowers to buy homes they really can't afford, but banks no longer trust the federal government at all. They know that when the tide goes out, no matter what they were told before, the politicians will all be screaming and pointing at their crotches screaming "Child molester, child molester!" So banks are not cooperating. In this rate environment, you cannot afford many bad loans.
I leave it to you all to figure out what those employment withheld tax figures imply for consumer spending a few months from now. Real retail has really been stalled for about six months at 188,XXX:
August 2015 was 188,XXX, and every other month was 188,XXX except the lowball of October. March, except for autos, should be better due to the early Easter. But then there were autos:
This is pretty much a classic US recession pattern that has been pulled like a piece of taffy.
There is a sharp, sharp discrepancy between the official employment numbers and the Treasury receipts. I'm betting on Treasury receipts, which are very, very hard number. The employment numbers are produced by sampling - Treasury receipts are the final vote count.
Rail does not provide any good news:
You can ignore the last week, because of an early Easter. But in March things really started to go bad.
Note that there were factors this year that should have been highly favorable for Q1 YoYs, including a port issue which suppressed freight in 2015, and generally, a much less oppressive winter that should have helped the whole economy, including freight and driving-around type activity. Construction activity should have been facilitated. Most of Boston could at least see the street signs, which probably made pizza delivery a lot easier.
In Q2, these factors will not be present, and the situation is going to become more obvious. But only mildly so - again, this is not the classic US tip-over, but instead the climbing down into the ditch style of European recessions. But they are LONG. Very long. They do a lot of damage.
I am in something of a quandary, because the employment reports are so off-kilter with other data that I no longer believe them. I am unwilling to publicly speculate as to what is happening with them, but they aren't right. They're not true. No. Not happening.
The Monthly Treasury Statements for February 2016 and February 2015 show a poor picture, but not as bad. It will be interesting to see the March versions.
February 2016: 49,202 (61,532) (You have to add FICA and DI, because FICA was redirected to DI)
February 2015: 50,848 (59,932)
We may be replacing higher-paid jobs with lower-paid jobs, but that's not what the Establishment report said was happening. We may be replacing one job with two jobs, but that's not what FUT or the Household Report says. So the employment surveys are telling us something that just isn't true.
Very highly paid employment is up over the year in comparison to low-paid employment. The weakness is in the lower end jobs. I know this because when I look at the February HI receipts YoY, they have increased more than the February FICA + DI receipts. As high end salaries run out their SS FICA cap, the discrepancy grows later in the year, although when there is a lot of job switching it is offset somewhat.
Balance of trade is quietly worsening. In fact all the lower-level data is rather consistent; economic activity is slowing YoY. And it simply must be showing up in employment, which is pretty much the NBER definition of a recession. Interestingly, JOLTS job openings come very close to the retail peak/sag in timing (peak July):
I don't see any epic crash forming, just a quiet inexorable sag. Manufacturing is not rebounding, and as things get tighter, there won't be much to rebound it. Inventories hadn't cleared as of January, and although there will be ups and downs, I don't think they can now:
If you look at the initiation of the last elevation, you'll notice it slots in well with the beginning of the retail stall and the JOLTS peak timing.
So I would shift my call to official recession beginning in March 2016. God only knows when NBER will recognize this. I don't see them as being very political, but they are not exactly street savvy either. They wouldn't know a subprime loan if it bit one of them on the butt, and most of the NBER committee members probably believe that mortgage lending based on income from individuals not obligated on the mortgage is a GOOD idea that leads to increasing economic prosperity. You might say that they are blind to some of the seamier nuances.
It might be next year before they notice. But I would guess they'll say something in November, after the election.
Friday, February 05, 2016
Employment, Suggestive Only
1) The adjustment for the Establishment Survey now creates a nice declining curve for the last three months for private sector employment (280 > 262 > 151). An obvious match to the initial claims, which have been slowly increasing since last October. Very pretty and all, but a total mismatch with the Household Survey.
2) The adjusted Dec/Jan MoM chanrge for the Household Survey is + 615,000 jobs, and 409,000 after the adjustment was removed. There is an obvious discrepancy of some 250,000 jobs between the two surveys. Further, the discrepancy is more than the expected error for the Household Survey.
3) Turning to the Birth/Death series, which is used only to compile the Establishment Survey numbers, the adjustment for January 2016 is highly negative at -233,000. If one adds that back in, one gets a lot closer to the Household Survey numbers, which are used to figure the unemployment rate.
Now, how you reconcile this is up to you, but January FUT seemed to indicate that employment was not too good in January. When in total doubt, I usually use FUT.
Now, for some M_O_Mish (possibly wrong!) explanation.
I think we still have a two-step economy. We all know about the problem with oil. The inflection change showed up beautifully in the 2015 NACO county survey. The stronger dollar hurts export business. Both of these affect larger companies more than smaller companies, although there is a high feed-through to smaller companies from the oil.
My theory is that small businesses are on net doing much better than big businesses, because I believe that aside from the oil issue, which is real-but-known, the primary hidden mechanism for this downturn is big businesses having gotten too frisky with debt as compared to possible income, and now they are not well-prepared to deal with a soft patch with declining profits, sticky revenues, and an impending interest rate increase. In short, they are tightening their belts in a coordinated manner.
And, since FUT January returns are dominated by big firms due to filing rules, this theory would go a long way toward explaining the discrepancies as listed above.
Further, there is some supported evidence in the NFIB preliminary jobs report (good hiring potential, hard to find qualified employees).
That, however, is not unalloyed good news. To rephrase, the primary CAUSE of this recession is that large companies are stuck because of getting too happy with the borrowing, and small companies are stuck because they need to raise wages more than they can afford to raise them with current revenues.
The NATURAL cure for a situation like this is that prices fall (happening to some extent), big companies get real, and small companies profit by contracting/taking over work with their preferable, lower, cost structures. It is not clear to me that this can happen, and in part it may not happen because of ACA.
There is also a huge structural regulatory cost to our economy which just keeps getting larger and larger. It weighs relatively more on small firms.
Next (whenever I get to it), a slightly more detailed look at causation and current factors. I would also like to refer to Learner2's comment on the last post, which I thought was very good.
Monday, February 01, 2016
Here's Something To Worry About
I prefer Ward's automotive data, because I find it the most accurate by far. Today I ran into this article, which is probably not available to the public. But you might be able to access it by registering.
The article predicts that first-quarter light vehicle North American production will be about level year over year and down from both the previous quarters. If this is true, we can take it that industrial production is going to be bad through this quarter.
Ward's then predicts that Q2 production will rise sharply, exceeding the prior three quarters and increasing over Q2 2015. Should the economy be in recession, one would suspect that this is too optimistic.
Since housing seems to be lagging a bit, with construction value increases YoY dropping sharply the last few months (at a time when weather was very favorable), that would leave us in pretty rough territory this year. Also, the unfavorable second-half retail spend is going to be cutting into state and some local budgets:
This is SA level Total Construction Spending. That impetus tailed out.
We had already lost this one - this is Industrial Production YoY, and it is not a pretty sight. End 2015.
This is retail YoY ex motor vehicles. One would assume that car dealers are working hard on the incentives, so maybe they'll move out the inventory and Q2 production will be okay. But on the other hand, when one looks at the rest of the economy one is skeptical.
Car sales have been the remaining push, although really light truck sales was what carried the end of the year.
Shortly we will get NMI Composite. This morning's manufacturing was the same as last month - crap. I have never seen services not follow manufacturing with a fall of this magnitude before.
The peak for existing home sales, most categories of retail, and NMI Composite seems to have centered on July of 2015, with only a slow drift down since.
But FUT!!! As of January 28th MTD:
January 2016: 512
January 2015: 524
I would say that services is following now.
Federal Unemployment Tax seems to be a very sensitive recession indicator, probably because it is charged quarterly on a very low level of wages, and thus it captures new hirings and opportunities to change employment for better wages/opportunity.
There was some sort of calculation change which increased SS awards for recent retirees. I don't know the details, but BEA calculated it at +8.8 billion annually. That will help.
Walmart's March increase may be pushing some other retailers to increase wages slightly.
Friday, January 29, 2016
I found your replies on the last post rather deflating, because you seemed to be describing what a recession looks like in its early stages, with patchy growth and caution. There is a good argument to the effect that most business-led recessions would never occur at all if more worry were felt earlier, because that would spread out the necessary adjustments and prevent the "oomph" stage when too many cuts are made at once, which precipitates the final impact.
Economies are always experiencing negative and positive adjustments - it's when the negative adjustments are too long deferred that one gets recessions.
I am really, really pressed for time, but here are the basics:
1) If my claim that we had fallen into a recessionary cycle sometime late in the fourth quarter 2015 were correct, two things would have to happen in January. The first would be that we would see the near-term bond rates kind of converge. This did happen. It's continuing to happen. The second would be that FUT (Federal Unemployment Tax, aka FUTA, receipts) would have to stop rising YoY. Unfortunately, that has also happened. As of January 27th 2015/2016, FUTA receipts MTD are 460 > 442. This is a very definite change in trend that marks diffusion of negatives, which occurs after a recessionary cycle has begun.
2) CMI is about where I expect it to be - showing that manufacturing isn't very good, and forecasting that services has another downtick still to catch up to manufacturing. If services had already backed down more, I would think that maybe there would be a chance of a very short contraction. But it doesn't look that way right now.
The best countervailing news is Walmart's announcement about pay increases in March. This will provide a bit of a helpful bump right when we need it. Whether the theoretical positive is compensated for by hourly cuts is another issue, so I can't try to estimate the real impact. It is a favorable and not a negative.
All the rest:
- Corporation income taxes continue to be down significantly YoY as seen in Daily Treasury receipts.
- The SS recipients get no increase this year, which is going to suppress consumer spending somewhat.
- We are on the wrong side of the credit cycle.
- As of this morning, BEA reports two consecutive contractions in Gross Private Domestic Investment. Despite the GDP headlines about consumer spending, there is a clear business spending problem, with contractions in nonresidential structures, computers and equipment categories.
- Industrial production we already knew about.
- Rail is not rebounding even as I expected it to rebound. I'm negatively surprised there. Purple was at one time considered a color of mourning.
- The advance report on durables was painful to the eyeballs. Let's just say there's more downside in manufacturing. This was a "Don't go into the basement alone!" report.
- If you look at unemployment claims, it is clear that they have been slowly worsening since October.
- As for the theory that services will carry us through - look at this graph from the Markit survey:
I expect this morning's GDP release to be revised up to about 1.1 or so. Maybe I am too optimistic, but compared to Q3 I think this is too low. Nonetheless, it's not pretty and I don't see any positives. Over the long run, the average GDP revision from the advance release is over 1%. Seriously. So I do not place much weight on reported GDP at the time it is reported. We really do not know GDP within 1% at any given current time. We really don't. It is much easier to track impetus and direction than worry about GDP.
I still think February is a good guess for the point at which NBER will eventually date this recession. Not that it matters.
I think that this recession should start out to be mild. Most business-led recessions are, and layoffs are mild. They are more of business credit corrections than anything else. The effect on employment and unemployment is initially very little. It is more change in job growth than anything else. They do tend to have a longer tail.
For this cycle, I believe that smaller businesses are generally going to be less impacted.
But - WHAT HAPPENS WHEN WE REACH THE TAIL? If this continues too long, we have the potential for one of those European-style events.