Saturday, August 17, 2013

Weekly Indicators: Jobless claims, consumer spending are the stars of the show edition

 - by New Deal democrat

There was a full plate of July monthly data this past week. Industrial production laid a big goose egg, unchanged for July. It is still lower than its recent March peak. The Empire State and Philly Fed indexes declined to slightly less expansionary. Capacity utilization declined. Retail sales were up, but after inflation were flat. The U. Michigan consumer sentiment index declined as to both the present and future expectations. The only unequivocal good news was that both housing permits and starts were up.

Turning to this week's look at the high frequency weekly indicators, let's start with employment metrics, one of which made a major positive breakout:

Employment metrics

Initial jobless claims
  • 320,000 down -13,000

  • 4 week average 332,000 down -3500

The American Staffing Association Index was unchanged at 96. It is up +3.1% YoY

Tax Withholding
  • $80.9 B for the first 11 days of August vs. $76.5 B last year, up +4.4 B or +5.8%

  • $139.5 B for the last 20 reporting days vs. $131.6 B last year, up +7.9 B or +6.0%

This week initial claims broke through to the downside of their recent range of between 325,000 to 375,000. Interestingly, it has been at this point in the year for each of the last three years that this same, good, downside breakout has occurred. The 4 week moving average also made a new post-recession low this week. Initial claims have now entered the realm of completely normal readings for an expanding economy.

Temporary staffing had been flat to negative YoY for a few months, but has now also broken out positively. Contrarily, tax withholding, while positive, had one of its worst readings in the last 7 months.

Consumer spending Gallup's 14 day average of consumer spending was over $100 this week for the second week in a row, its best showing since the financial crisis of September 2008, almost 5 years ago. The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. The ICSC had a decent week this week as well, and Johnson Redbook remains close to the high end of its range.

Oil prices and usage
  • Oil up +$1.49 to $107.46 w/w

  • Gas $3.56 down -0.07 w/w

  • Usage 4 week average YoY up +2.6%
The price of Oil remained near its 52 week high. The 4 week average for gas usage was, for the sixth week in a row after a long streak to the contrary, up YoY.

Interest rates and credit spreads
  •  5.34% BAA corporate bonds up +0.02%

  • 2.62% 10 year treasury bonds down -0.02%

  • 2.72% credit spread between corporates and treasuries up +0.04%
Interest rates for corporate bonds had been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries previously were at a 2.4% high in late 2011, falling to a low of 1.47% in July 2012, but remain back above that high. Spreads backed off their new 52 week low this week. Their recent high was over 3.4% in June 2011.

Housing metrics

Mortgage applications from the Mortgage Bankers Association:
  • -5% w/w purchase applications

  • +4% YoY purchase applications

  • -4% w/w refinance applications
Refinancing applications have decreased sharply in the last 12 weeks due to higher interest rates, and are now just about as bad as they have been at any point in the last 7 years. Purchase applications have also declined from their multiyear highs in April, but are still slightly up YoY.

Housing prices
  • YoY this week +8.7%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase is still close to a 7 year record.

Real estate loans, from the FRB H8 report:
  • down -7 or -0.2% w/w

  • unchanged YoY

  • +1.7% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  Over the last few months, the comparisons have completely stalled.

Money supply

  • -0.1% w/w

  • +2.1% m/m

  • +9.4% YoY Real M1

  • +0.2% w/w

  • +1.1% m/m

  • +5.1% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and eased off thereafter. Earlier this year it increased again but has backed off its highs significantly.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It increased slightly in the first few months of this year and has generally stabilized since, although it has declined slightly in the past few weeks.


Railroad transport from the AAR
  • -500 carloads down -0.2% YoY

  • +3800 carloads or +2.3% ex-coal

  • +14,800 or +6.1% intermodal units

  • +13,400 or +2.7% YoY total loads
Shipping transport Rail transport has been both positive and negative YoY in the last several months. This week was its most positive since that began. The Harpex index had been improving slowly from its January 1 low of 352, but has flattened out in the last 9 weeks. The Baltic Dry Index has retreated from its recent 52 week high. In the larger picture, both the Baltic Dry Index and the Harpex declined sharply since the onset of the recession, and have been in a range near their bottom for about 2 years, but have stopped falling.

Bank lending rates The TED spread is still near the low end of its 3 year range, and has fallen back from its slight rise in the last month.  LIBOR established yet another new 3 year low.

JoC ECRI Commodity prices
  • up +1.23 to 124.99 w/w

  • +6.02 YoY
Once again this week the positives far outweighed the negatives. Negatives were mortgage applications, tax withholding, and interest rates. The Oil choke collar engaged a little more. Shipping rates were neutral.

Everything else was positive. Rail had a very positive week, gas prices were lower, gas usage was higher, house prices were very positive, bank rates were very positive, money supply remained positive, and temporary jobs were positive again.

But the star of the show once again was the American consumer especially as measured by Gallup, this week joined by initial jobless claims, at new post-recession lows measured both at 1 and 4 weeks.

Have a nice weekend.

Friday, August 16, 2013

Weekend Weimar, Beagle and Pit Bull

I'll be back on Monday; NDD will be here over the weekend.

The truth about the decline in real median household income

- by New Deal democrat

This is the final installment in a series I began a couple of months ago, after Pulitzer Prize winning journalist David Cay Johnston was taken in by a Doomer argument based on unit labor costs falling over 5% on a real basis in the first quarter, and It was picked up on Prof. DeLong's blog. The number is true, but all it did was take back a little more than half of the +8% rise in unit labor costs from the 4th quarter of last year. In other words, it reflected the shifting of income forward from 2013 to 2012 due to the so-called "fiscal cliff" and its unknown (at the time) tax increases. As of this writing, real personal income as reported monthly is higher than at any time except for last December. Second quarter unit labor costs will be reported on August 29. (Update: They were actually reported this morning, up 1.4% before inflation, or up about 0.9% after inflation).

In any event, Johnston's article went on to opine that the unit labor cost drop was part of a bigger dismaying trend: a decline in real household income that dates back to the turn of the Millennium. He cited, among other work, that of Professors Saez and Piketty of Berkeley, who have documented a 10% decline in the incomes of the "bottom 90%" and further how the top 5%, 1% 0.1% and 0.01% have pulled away from all other households.

And it is true. Real family and household income fell about 10% between 2008 and 2011. Most likely it ihas recovered some since then, but is still far below its pre-recession level. As we will see, it is mainly a result of the decline in the employment to population ratio, and not about a decline in wages themselves.

Provoked by the exchange, I decided to take a detailed look at both mean and median wages and household income. As to wages, the results showed that in real terms both average and median wages actually rose during the great recession, almost entirely due to the decline in gas prices from $4.25 in July 2008 to $1.40 in December 2008. Since that time, gas prices rose back as high as $3.95 before retreating to oscillate around about $3.60 as they have for the last year. This rise worked its way through the general price level, causing both real mean and median wages to fall again. Average (mean) wages are currently about where they were in 2009, having peaked in 2010. Median wages peaked in 2009, and have fallen back down to 2007 levels. Both progressions are shown in the graph below:

Thus, if we measure from 2010 and 2009, respectively, both mean and median wages fell by about 3% and bottomed in 2011 or 2012 before rebounding slightly this year, as measured by average hourly wages, the employment cost index, or the median weekly wage.

So how do we square this with the reported 10% decline in household incomes? The natural thought after hearing those numbers is to think something like, "OMG, wages have really been cut, and far worse than we were led to believe!" That would be wrong, not that certain Doomers intentionally or ignorantly don't understand.

The explanation is more complicated. Income includes more than wages. For example, it includes interest on bank accounts (you remember when that used to happen, right?) and from investments like bond mutual funds, held by many more affluent households. It also includes dividends on stocks, including those held in 401(k)'s.

Not only that, but when we talk about "families" and "households", we are talking about something other than "wage-earners." As longevity has increased and Baby Boomers age, the proportion of households of one or more retired persons has been booming as well. There is a second type of non-wage earning household, and that is one wage-earner has lost his or her job. Both of these kinds of households are included in calculations of real median family or household income, and as it turns out, that makes all the difference.

Now let's turn to the evidence. Real family income and real household income is typically reported from three sources: (1) the Census Bureau; (2) Sentier Research; and (3) Professors Piketty's and Saez' studies of income inequality.

The Census Bureau issues an annual report on average and median household income. Households are defined to include any with a member over 16 years of age, and so includes retirees. The last such report was issued in September of 2012, with data through 2011. In its 2012 report, the Census Bureau found thaat the median household in the US still has not exceeded its 1999 high of $54,932. Afer falling in the early 2000's, median household income rose so far as $54,489 in 2007, before falling to $50,054 in 2011. This is close to a 10% loss.

Sentier Research has taken the data one step further. Using questions from the Household Survey, they publish a monthly update on real household income. Doug Short always includes the report at his site, with a very helpful graph, below, showing that real median household income as calculated by Sentier peaked at $56,550 in 2008, and fell all the way to $50,722 in 2011 before rising slightly since. As of June, Sentier reported that median household icome was $52,098:

Profs. Saez and Piketty report on median family income as opposed to household income. For their purposes, a household may include more than one family, especially if there are extended family members or in-laws in the house. Their methodology is different: they examine income tax returns, and report on the median return for the 0 - 90th percentile (i.e. the 45th percentile) as well as various breakdowns of the top 10% of families. They also update data on an annual basis. They last issued a preliminary report for 2011 (pdf), which will be updated shortly. Their results are very similar to those published by the Census Bureau and by Sentier. They find that the median income of the bottom 90% has fallen by almost 14% from $35,173 in 2007 to $30,437 in 2011. Here's the graph of median family income for the bottom 90% from their most recent report:

I have no reason to quarrel with any of the methods used by the Census Bureau, by Sentier, or by Saez and Piketty, nor do I have any reason to doubt the accuracy of any of the their results. (NOTE: That Piketty and Saez do not limit their data to working households and wages is set forth in their above study in Note 1 to figure A1b as to the definition of income, where it appears that not all non-wage income is excluded.  Similar although not identical definitions of income, and the definition of family unit, are used for Table A0 and Table 1, as well as under the tab "Explanations."  In any event, it appears that interest income is included for all of these tables. It should also be noted that Piketty and Saez do not include transfer payments like Social Security in their definition of income).

But, as I have indicated above, it would be mistaken at least, or misleading or worse, to interpret these reports as telling us anything about wages (this is the mistake that the blog Credit Writedowns made last weekend). Most importantly, all of the data sets include households, or families, where the adults are retired. Whether a family or household is of working age or retirement age makes a huge difference to their incomes. Let me show you two graphs showing just how big a difference that is.

First, here's a graph of all households vs. working age households only using the 2011 Census Bureau data:

Now here's a second graph, this one comparing households in the 35-44 age group with retirement age (65+) households:

Notice that not only are working age households considerably above the median for all households, but retirement age households are far beneath it. Even though over time the financial position of retirement age households has improved (largely because of longevity causing a large increase in elderly workers, most pronounced at the age of 75+!), retirement age households evan as late as 2011 were earning only a little more than 1/2 of the median working age household. In short, choosing to retire almost always requires accepting a very large decline in income, as retirees must live on accumualted savings and investments and interest from them, as well as Social Security, and if they are very fortunate a pension. With 10,000 Boomers hitting age 65 each and every day, the proportion of households consisting of retirees is increasing dramatically - and that is pulling down median housheold income.

But that is only part of the story. The other part is that about 9 million jobs were lost in the recession, and only a fraction of those have been recovered on a population-adjusted basis:

As a result of both people dropping out of the labor force due to giving up looking for work, and the tidal wae of Boomer retirements, the employment to population ratio has plummeted, and has barely recovered from its 2011 low:

The above explanation of why household incomes have declined so much makes sense on an intellectual basis. But can we test it empirically using available data? Not perfectly, but we can come pretty close.

If median wages remained the same, and if dropping out of the labor force for any reason resulted in a household falling into or remaining in the bottom 50% of all households, then the change in median family or household income would simply be a function of the employment to population ratio. If, for example, 10% of all households dropped out of the labor force, and they all were thereafter in the bottom half of the income distribution, then if they were randomly distributed beforehand throughout the income distribution, median income would be fall from the former 50th to former 45th percentile.

We can closely reproduce this result in the data, by starting with the median wage as measured by the Employment Cost Index, deflating it by the CPI, and then multiplying the result by the employment to population ratio. This allows us to factor in both what is happening with real median wages and also the percentage of people who have dropped out of or entered the labor force. A 10% fall in the employment to population ratio ought to put us at about the former 45th percentile as the new median, if roughly half of the fall comes from households previously above the median, and half from households already below the median. As graphing luck would have it, we know from the 2011 Census Survey that there was a $12,000 difference bewtween the 40th and 50th percentile in median households. Just over half of that puts us at a little over a $6000 decline in moving from the 50th to 45th percentile. So a 10% decline in the employment to population ratio should give us about a $6000 decline in real median household income. Here's what we actually get:

While this isn't a perfect fit, beginning to drop off about a year before the Sentier data does, (but in line with the peak of Saez and Piketty's data), it is a very similar decline of nearly 10%, and a slight rebound thereafter. I have scaled the result by 1750 to match the peak $ value on Sentier's data for ease of reference. Our replacement graph peaks at about 56,500, declines to just over 51,000, and then rebounds to 52,000 as of the end of June 2013 - very close to the values in the graph of Sentier's results.

So our empirical reconstruction, while not perfect, largely duplicates the results from the Census Bureau, Sentier, and Saez and Piketty. We should get the 2012 information from the Census Bureau in about a month. Based on the above information, I expect that report to show a sideways move in median real household income in 2012, and possibly a very slight increase.

In conclusion, the next time you hear about a decline in real median family or household income, remember that the majority of that decline is not because there has been a widespread decline in real wages. Rather, there was about a 10% drop in median family and household income betwen the onset of the great recession and 2011. According to Sentier, there has been a slight rebound thereafter. While the decline in real median wages explains about 3% of that 10% decline, the remainder is most likely almost entirely explained by a decline in the percentage of working adult households, both from Boomer retirements and from discouraged workers giving up the job search. Median wages themselves are at about the same level they were at just before the recession. They have risen and fallen within a range since then largely in response to changes in the price of gas, but overall they have stagnated.

Thursday, August 15, 2013

Market/Economic Analysis: Emerging Economies

The central story of the last 10-20 years can be distilled down to the following story: emerging developing economies (EDEs) sell raw materials to China, who convert these materials into goods purchased by the US, Japan and EU.  First, let's take a look at these markets   First, let's look at how these regions are tied together.

The above chart compares Latin American indices (represented by the GML ETF in blue) and the Chinese index.  While the two have not always traded in complete synch, we see a strong correlation in 2010-100 and 2013.  The reason is Latin American economies are raw materials exporters.

And we see a very similar relationship between the Chinese market (in black) and the emerging markets in general (in blue).   It's not always a strong relationship (see the really in blue in 2012 compared to the fall in China).  But there are periods of strong correlation.

Here's the basic problem, as shown on an IMF chart:

 (Click for a bigger picture)

All of the emerging economies printed slower growth in 2012.  Also note the slowdown in exports and imports for the region.  Exports dropped because of a slowing world growth environment and imports slowed because of slower overall growth, meaning less internal consumption.  As the same IMF report noted:

At 5 percent in 2013 and about 5½ percent in 2014, growth in emerging market and developing economies is now expected to evolve at a more moderate pace, some ¼ percentage points slower than in the April 2013 WEO. This embodies weaker prospects across all regions. In China, growth will average 7¾ percent in 2013-14, ¼ and ½ percentage points lower in 2013 and 2014, respectively, than the April 2013 forecast. Forecasts for the remaining BRICS have been revised down as well, by ¼ to ¾ percentage points. The outlook for many commodity exporters (including those among the BRICS) has also deteriorated due to lower commodity prices. Growth in sub-Saharan Africa will be weaker, as some of its largest economies (Nigeria, South Africa) struggle with domestic problems and weaker external demand. Growth in some economies in the Middle East and North Africa remains weak because of difficult political and economic transitions.

Remember trade is essential to all of these developing economies.  Here's a chart from the world bank that shows the importance:

Data from World Bank

All of these countries will continue to grow, largely because China will continue to be an exporter.  And when their goods and services prove too expensive because of rising input costs, other countries will emerge that can provide for the assembly of these products.

Also note that these countries are raw material exporters, so the fact that commodities are at low prices almost across the board right now (with the exception of oil) is hurting.

At the same time, consider this graph from Barry over at the Big Picture:

The bottom line is emerging markets have proven to be big winners for a majority of the time over the last 10 years.

Is the EU Recession Really Almost Over?

Last week I noted that recent data -- specifically from the Markit manufacturing and service sector surveys -- were pointing to an EU recover, probably by the end of the year.  This week we learned that the EU experienced economic growth for the first time in six quarters.

Let's take a look at some of the statistics that are still negative, starting with industrial production:

The overall trend for EU IP is still clearly lower.

Also consider the very weak credit environment:

Here is the explanation offered by the ECB in their latest monthly report:

Overall, growth in loans to the non-financial private sector remains subdued in the euro area, mainly reflecting low levels of demand, although supply constraints remained in a number of countries.  Weak economic activity and persistently high levels of economic uncertainty continue to weigh on the demand and supply of bank loans. In this respect, the July 2013 bank lending survey identifies subdued fixed investment activity as the main factor explaining the weakness in loans to nonfinancial corporations. Moreover, while the July 2013 bank lending survey signalled limited changes in the net tightening of banks’ credit standards overall (and even a decline with respect to loans to
households), it continued to identify borrowers’ risk and macroeconomic uncertainty as the main factors restraining lending policies (see Box 3). At the same time, the persisting fragmentation of financial markets and tight credit supply constraints, although receding in recent months, continue to curb credit growth. Finally, the still high level of indebtedness for both households and non-financial corporations in a number of countries is also weighing on loan growth.

Remember that credit growth is an indication of an expanding economy.  In this low rate environment the mathematical decision to take out a loan is easily complied with, as the time value of money is so low.  The negative growth rate indicates there's still a long way to go for economic progress to be meaningful.

Also consider this chart of retail sales:

While the number has been increasing since 3Q12, the overall level has been relatively flat for about three years -- definitely not a good sign.

Two of this numbers are coincidental economic indicators.  So, if the recovery is still in its early stages we shouldn't expect a ton of movement.  But the fact we're still seeing this numbers at more or less stall speed tells us that the recovery is still nascent and may not even occur.

Wednesday, August 14, 2013

Thoughts On All Things Economic

Over at the Big Picture, Barry has been doing a lot of thinking on economists.  His discussion has got me thinking about this topic as well.  Most importantly, I've been thinking about how we at the Bonddad Blog fit into the great pantheon of all things economic.  To explain, let me first provide a bit of personal history.

Neither I nor NDD is a "formally" trained economist.  I first learned about the economy from reading the WSJ in college.  I took (I think) about 15-18 hours of econ in college and in a few courses after college.  I also learned basic econ from various Series 7 courses that I took to get my Series securities license.  When I moved over to fixed income, I had to keep up with economic developments on a regular basis to talk with clients.  And I've obviously kept up with the economy in my legal career as this information is very beneficial to my client inter-actions. 

Over the last few years, on advice of Mark Thoma I've wound up reading a fair number of the early economic writers (Smith, Say, Mill) and some of those who I consider transition economists (those that wrote in the early 20th century) such as Fisher and Marshall.  For post Depression analysis I have two copies of my Samuelson macro book from college along with several international economics texts.

Everything that I've read and studied up to this point really falls under the rubric of "political economy" which was the educational designation of writers such as Smith and Say in the early stages of the development of the economics discipline.  What they sought to do in their writing was to explain at a high level how the economy worked by describing the various actors, the work they did, and the various large components of the macro level economic system.  I remember that as I was reading Adam Smith for the first time I realized that he was describing in detail the various parts of the GDP equation in a fairly detailed manner.  The same can be said for Say and Mill.  Marshall's and Irving's work represents the logical bridge between the earlier economists and later writers such as Samuelson and Friedman, as both Marshall and Irving described in more detail things like price mechanisms and the various events that effect them in the short, intermediate and long term.  There is also the importance of several international text books that explain things like the balance of payments and current account deficit.

What has been distinctly lacking in any of these texts is reliance on complex statistical models.  While there are the general graphs of supply and demand, aggregate level supply and demand and the IS/LM model, all of these graphs show general relationships and flow of funds through an economy.  And this is where I personally "draw the line" as it were.  I've read a ton of economists who base their conclusions on complex mathematical models.  And, frankly, I have an incredibly hard time with that for two reasons.

1.) The US economy is over $15 trillion in size and has over 300 million individual participants.  There is simply no way that your model can account for all the variables in something that big.  It's just not even remotely feasible.

2.) You can make anything look good in a model.  Consider the nature of the "rationale expectations theory" and how it relates to the austerity movement.  Here is an explanation of the rational expectations theory that highlights how incredibly out of touch it is with reality:

Imagine the economy is falling around your ears; you don’t know if you’re going to have a job tomorrow, your partner is already unemployed, you really don’t know about the future, but you really worry about the debt, you just lie awake all night worrying about the debt as people do,

So the government credibly signals that it’s going to massively cut government expenditures and what you do using your rational expectations that are built into your head – well you know the true structural form of the equation governing the economy and the value of the co-efficients therein – big assumption, but put that to one side – you calculate your lifetime budget and lifetime expenditures in relation to the fact that twenty years from now that because of these state spending cuts now you’ll pay less taxes then.  Thereby you can retrodect how much extra money you’ve got now and everybody goes to Ikea and buys a couch and that cures the recession.

I am not making this shit up.

That's economist Mark Blythe.

An entire economic argument in favor of austerity was based on the above rationale.  Raise your hand if you think anybody thinks that way.

And most importantly, not only were the analytical underpinnings of austerity proven wrong, the application thereof has been an absolute disaster as demonstrated by both the UK and EUs' experience over the last three years.  And this in spite of the fact the model said it would perform brilliantly. 

A model that tries to show general relationships and general flows of funds is worth looking at.  But complex models that claim to model the entire US economy just aren't worth the time of day no matter how good the algorithms backing it up.

So, let me return to the idea of what we can do and how that applies to our readers.

1.) We can observe general trends in the economy.  We do know that there are leading, coincident and  lagging economic indicators.  We know because there has now been enough history and statistical record keeping to show these relationships.  In watching these trends we can make some generalizations about potential directions the economy will take.

(Completely as an aside, go to the Conference Board's website and look at the different leading and coincident indicators for different economies.  It's really interesting)

2.) We can essentially play the odds and say things like, "with all/most of the leading indicators doing x, we can say with a fairly high degree of certainty that y will happen.  It's not a forgone conclusion, but we can say there's a distinct possibility.

3.) We can show correlation, but in doing so we must understand this may not be causation, or that the causal relationship is not as strong as the data implies.

4.) We can look at the data and the historical record to show you what happened when.  The US -- especially since WWII -- has been keeping a fairly detailed statistical record of the US economy's overall performance.  There are also some pretty good anecdotal records (The Fed's annual summary, the Economic Report to the President) that give us fairly decent context.  

5.) We can make general calculations about the economy.  For example, we know the GDP equation and we also have a fairly decent idea about multipliers.  So we can do things like, "if we increase government spending by x, with this multiplier, we should get y."  We can do the same thing with other GDP components.

6.)  We must understand that we can be wrong. 

Tuesday, August 13, 2013

The Developed World Is Leading the Developing World

From the Economist:

Will The Wealth Effect Lead to Increased US Consumer Borrowing?

As I noted last week, I'm pretty sanguine about the US economy.  Despite some decent ISM numbers last week, we're facing a third year of budgetary stupidity in Washington.  When this is combined with the weak reading in US GDP over the last three quarters, I don't see much beyond a subdued (or should I say "moderate") expansion.

But we may have a wild card in the mix.  Although overall pay growth has been fairly paltry this expansion (which is what you'd expect in a 7%+ unemployment environment) US consumers now have room to increase their revolving credit levels to power consumer spending.

Consider this chart of household (and non-profits) net worth:

During the recession, this number took a big hit as equity and house prices dropped.  But the stock market has been rallying for the last three years, and homeowner's equity has finally started to increase:

This can lead to what economists call the wealth effect, which is

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more. For example, economists in 1968 were baffled when a 10% tax hike failed to slow down consumer spending. Later this continued spending was attributed to the wealth effect. While disposable income fell as a result of increased taxes, wealth was rising sharply as the stock market moved up. Undaunted, consumers continued their spending spree. 

Consider the above data in light of the remarkably strong balance sheets US consumers now have:

“Household finances are in the best shape in decades,” said Joseph Carson, director of global economic research at AllianceBernstein LP in New York, with $435 billion in assets under management. “We now have a creditworthy borrower. It’s a powerful ingredient” for the U.S. expansion and “definitely a step up from where we have been.” 


Households may become even more open to taking on debt as property values appreciate, stock prices hover near a record high and improving job prospects boost confidence. Payrolls rose by 162,000 in July, and the unemployment rate fell to a more than four-year low of 7.4 percent

The U.S. is entering a new, “stronger growth phase” as healthier finances revive borrowing, Carson said. Credit will spur consumer spending, the biggest part of the economy, generating business investment and jobs to extend the expansion well beyond a fifth year since the recession ended in June 2009, he said

Here's a chart to show the condition:

 NDD has recently noted the slight uptick in the ratio.

Also note the low level of overall revolving debt:

The chart above shows that US consumers paid down their revolving debt during the recession and into the recovery, but really haven't picked up the pace.  It's always possible that they won't out of concern for increasing their debt payments.  But, they could increase their borrowing assuming they feel confident enough in the future.  To that end, consider the University of Michigan's consumer sentiment index:

The index had finally advanced into the territory that was on the lows of the previous expansion's readings.  But we saw a retreat last month.  I don't think the current levels would lead to a large increase in credit spending, but a few more months of slightly higher readings with better unemployment news might.

Monday, August 12, 2013

Mexico to Liberalize Oil Industry

From the FT:

President Enrique Peña Nieto will take a leaf out of the history books when he reveals a long-awaited energy reform this week that aims to attract private companies to invest in Mexican oilfields for the first time since they were nationalised 75 years ago.

According to the story, there is sufficient political support in the Mexican Congress for this.  But only time will tell if it actually goes through.  If it does, it will be one of the most important developments in the oil market over the last 50 years.

All  that being said, let's take a look at the Mexican ETF.

 First, note the incredibly tight correlation with the SPYs over the last three years.  The reasons are obvious; US-Mexico trade is incredibly important for both economies and more or less syncs the two together in the broader sense.

The Mexican ETF trade sideways for the first four and a half months of the year, trading between the upper 60s and lower 70s.  The market corrected in unison with the SPYs but at a far sharper rate.  Note in increase volume and the sharp move lower (the market moved almost 25% lower from peak to trough).  Now the market is moving higher; it has moved through all the EMAs, we see a general volume inflow and rising momentum. 

The chart says buy.

Oil Is Still Trading At Elevated Levels

Here's a chart of oil

The 104-108 range is still holding.  There are a few reasons.

Increased Demand:

Oil demand in the US is rising at its fastest pace in more than two years, driven by buyers of industrial fuels such as gas oil and liquefied petroleum gas.

Data from the International Energy Agency show that demand for oil in the US increased in four of the first six months of the year – the strongest run since early 2011. As a result, the energy watchdog has upgraded its forecast for US demand this year from zero growth to 0.3 per cent – indicating the first year of growth since 2010.

The reason is simple: supply disruptions. From oil theft in Nigeria to the closure of ports in Libya and transit disputes in South Sudan, unplanned outages are on the rise. By September they are set to hit a 10-year high of 3.4m barrels a day, according to Energy Aspects, a consultancy.

That is almost 4 per cent of global demand. It is also more than double the combined output of the Bakken and Eagle Ford shale formations – the twin centres of the US oil revolution – underlining how rising North American supplies are being overwhelmed by problems elsewhere.

Market/Economic Overview: US

Let's start by reviewing the data releases from last week.

The Good

The ISM Services index printed very strong in last week's reading:

"The NMI™ registered 56 percent in July, 3.8 percentage points higher than the 52.2 percent registered in June. This indicates continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 60.4 percent, which is 8.7 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 48th consecutive month. The New Orders Index increased significantly by 6.9 percentage points to 57.7 percent, and the Employment Index decreased 1.5 percentage points to 53.2 percent, indicating growth in employment for the 12th consecutive month. The Prices Index increased 7.6 percentage points to 60.1 percent, indicating prices increased at a significantly faster rate in July when compared to June. According to the NMI™, 16 non-manufacturing industries reported growth in July. Respondents' comments are mostly positive about business conditions and the overall economy." 

The US trade deficit came in at a fairly narrow $34.2 billion.  While the deficit has been fairly consistent over the last few years:

We should be concerned about the weak export performance over the last year and a half:


The JOLTs survey was released by the BLS, once again showing the labor market is weak.  Here's a key takeaways from the report:

The number of job openings in June (not seasonally adjusted) was little changed over the year for total nonfarm, total private, and government. Although the number of total job openings was little changed over the year, several industries experienced increases and several industries experienced decreases. In the Midwest region, the number of job openings rose over the year. (See table 7.)


Over the 12 months ending in June, the number of hires (not seasonally adjusted) was little changed for total nonfarm, total private, and government. The number of hires increased in information over the year but fell in durable goods manufacturing and in educational services. The hires level declined over the year in the Midwest. (See table 8.)

Let's turn to the markets

 The SPYs have been trading in a range between 167 and 171 for the last two and a half weeks.  The real issue with this chart is the declining momentum reading, as shown by the lower MACD peaks that printed over the last three months.  Combine that with a very weak summer trading environment, and you have a recipe for stalling.

The IEFs are also trading in a range, however theirs is occurring between 100.0 and 103.  It appears the market is accepting this overall level as the natural post-Fed announcement trading range/interest rate level.

 And the dollar continues to be range bound as well.

Look -- there's just not much happening in the market right now.  For the first August in a number of years, it seems as though everyone is actually taking a vacation.  There is little in the news to meaningfully sway the markets either way and barring a cataclysmic event, there probably won't be any major movement for the next few weeks.

Sunday, August 11, 2013

Dear Credit Writedowns: No, No, No, No, No!

. - by New Deal democrat

The blog "Credit Writedowns" has a post this morning entitled Household Income in the U.S. remains well below pre-recession levels.

That headline is completely accurate, but then the post starts off immediately with the statement that
One of the key reasons for the mediocre economic growth in the US has been the ongoing weakness in household wages.
And shows this graph of household income in support:

The post continues:
A large part of this wage dislocation can be explained by significantly higher use of part-time labor in the US....
Furthermore, a good part of the US job creation over the past couple of years has been in the low wage sectors. That, combined with the part-time employment trend (above) keeps household wages from rising substantially in spite of lower unemployment figures.
.... Moreover, some are suggesting that the Patient Protection and Affordable Care Act will ultimately result in even higher ratios of part-time employees – and therefore lower household incomes. ....Whatever the case, with wage growth suppressed and consumers still driving over 70% of the nation’s GDP, weak economic growth should not be a surprise.
While I agree that wage stagnation is a very important issue, Credit Writedowns has conflated wages with household income. Wages have NOT gone down nearly 10%. Rather, the fact that the employment to population ratio has dropped precipitously, partly because of increased unemployment, but also at least partly because of the wave of Boomer retirements, plus the collapse of interest rates to virtually zero on income bearing instruments like CD's and bonds, has caused a significant percentage of households to have dramatically lower incomes.

Further, as I have pointed out nearly every month for nearly four years, aggregate hours worked have increased considerably more than payrolls. And as I showed just last week, since payrolls bottomed at the end of 2009' almost all of the growth on net has actually come in the form of full time jobs.

The Credit Writedowns post is simply wrong.