Saturday, October 21, 2017

Weekly Indicators for October 16 - 20 at XE.com


 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The divergence between the long term and short term forecasts that became apparent las week continues.

Thursday, October 19, 2017

"Hurricane adjusting" initial claims has proven its value


 - by New Deal democrat

For the last month, I deduced a "hurricane adjusted" number for initial claims, which showed that the previous underlying positive trend was intact, with the four week average remaining in the 230,000's.

That approach was borne out by this week's report, which, at 222,000, was the lowest since 1973.

Although I haven't gone through the entire formal exercise, here's how the numbers from the three affected jurisdictions compared in last week's report compared with one year previously:

FL 13,861 (+6508 from 2016)
TX 16,656 (-225 from 2016)
PR 250 (-2409 from 2016) (DoL estimate)

Net change: +3904 from 2016

Since the seasonal adjustment last week was only ~6%, (244,000 vs. 229,289 NSA), this means last week's "hurricane adjusted" number was on the order of 239,000 or 240,000.

Natural disasters will continue to strike. I am confident that the method I used in 2012 after Sandy, and again this past month, is a good way to distill the underlying trend from the disaster disturbance.

Labor Market Slack and Weak Wage Growth

From the IMF's latest World Economic Outlook:

Sluggishness in core inflation in advanced economies—a surprise in view of stronger than expected activity—has coincided with slow transmission of declining unemployment rates into faster wage growth. Real wages in most large advanced economies have moved broadly with labor productivity in recent years, as indicated by flat labor income shares (Figure 1.4, panel 6). As shown in Chapter 2, muted growth in nominal wages in recent years partly reflects sluggishness in labor productivity.1 However, the analysis also reveals continued spare capacity in labor markets as a key drag: wage growth has been particularly soft where unemployment and the share of workers involuntarily working part-time remain high. The corollary of this finding is that, once firms and workers become more confident in the outlook, and labor markets tighten, wages should accelerate. In the short term, higher wages should feed into higher unit labor costs (unless productivity picks up), and higher Sluggishness in core inflation in advanced economies—a surprise in view of stronger-than expected activity—has coincided with slow transmission of declining unemployment rates into faster wage growth. Real wages in most large advanced economies have moved broadly with labor productivity in recent years, as indicated by flat labor income shares (Figure 1.4, panel 6). 

     Consider the following chart from the Atlanta Fed:



For the longest time, I've been staring at the lower left-hand corner of that chart and thinking, "weak wages are really about low utilization."  Let's place that data into context:


The above chart shows the absolute number of employees working part-time for economic reasons.  The total number -- after 8 years of economic growth -- is only now returning to the heights of the previous expansion.  

     Here's another chart of the data:


This chart (better known as the U-6 unemployment rate) presents the information in a percentage format.  This statistic was 10% at the beginning of 2016, which was the highest level of the previous recession.  But during this expansion, we hit this level a full seven years after the recession ended.  That's quite a delay.  

     The excerpt from the IMF report adds two key pieces to this puzzle: First, the US is not the only country experiencing weak labor utilization and a corresponding weak wage growth.  In fact, The IMF strongly implies this also seems to go hand-in-hand with the weak pace of global inflation.  Second, the IMF has research that links these two concepts.     



Wednesday, October 18, 2017

Underlying industrial production trend ex-hurricanes remains positive


 - by New Deal democrat

A few weeks ago, I suggested a hurricane workaround for industrial production. That approach was to average the four regional Fed indexes excluding Dallas, and add the Chicago PMI, and finally discount for the unusual strength this year in these regional indexes vs. production.

Here was my conclusion:
The average of the 5 is 22.9.
Dividing that by 5 gives us +.5.
Subtracting .3 gives us +.2. 
We can be reasonably confident that underlying trend in industrial production in September, despite the hurricanes, has been positive.
That approach was borne out yesterday when overall September Industrial Production was reported at +0.3%, with manufacturing production up +0.1% as shown in the graphs below.:

First, here's the longer term view,. Note that the decline in 2015 was due to weakness confined to the Oil Patch:



Here is the close-up of this year:



That's the good news.  The bad news, of course, is that even with this improvement, the big (revised) August decline of -0.7% in production, and -0.2% in manufacturing has not been overcome, and production is still below where it was this spring.

If we were to apply the same workaround for August as we did for September, however, the forecast would have been a manufacturing reading of +0.2% for that month as well.  That would be enough to put us slightly above where manufacturing production was earlier this year.  Indeed, the Fed suggested that but for the hurricanes, September would have been +0.25% higher.

So despite the softness in industrial production the past few months, I believe the overall trend remains slightly positive and not suggestive of any underlying downturn in the economy.
                           

-- From Bonddad

Something to remember about industrial production is that, this cycle, it is the weakest coincident indicator.  Consider the following two charts:




The top chart shows the overall industrial production index, which peaked in the first half of 2014, dipped and has since risen a bit.  But it is still about the same level as the last expansion's peak.  The bottom chart explains why.  When we break the index down into market groups, we only mining (above in green) has done well.  Manufacturing (in blue) and electricity production (in red) have been trending sideways since early 2012.




About This "Renegotiating NAFTA" Thing ...

While I'm sympathetic to the plight of that percentage of the U.S. population that has seen stagnant wage growth for the last 30-40 years, I also think it's important to highlight the data underlying trade with Canada and Mexico post-NAFTA -- data which shows that someone benefited from the agreements as well.  To that end, consider these two charts:





NAFTA was put into force at the beginning of 1994, which, coincidentally, is when the two charts above begin.  The top panel shows total US exports to Mexico, while the bottom shows total US exports to Canada.  Between the years 1994 and 2017, total exports to Mexico increased 8 fold while those to Canada were up 3 fold.  In other words, there were also clear winners on the US side.  

     There are problems with trade -- there always are.  But there are also benefits, which have been greatly overlooked over the last few years.