Monday, July 28, 2014
The Depressing Post
A) You may or may not have noted the Yellen (Sweet Monetary Manna Mama, aka SMMM)/Bullard-Fisher contretemps (Axis of Purported Liquidity Rationalization, aka APLR).
SMMM claims that theoretical unemployment rate masks an underlying labor slack that is very destructive to the economy, and thus rate increases will be deferred. APLR claims that conditions are such that the Fed has met its goals and must proceed quickly to raise rates while they still can.
Who's right? First, I think the Fed really had a meeting and drew lots to distribute the Inflation Hawk suit. They're worried enough about that 4.5 T on the books that this time there were two short straws. Thus the flight of APLR falcons. We may all pause to admire their arabesques through the skies of NYC as they attempt to bring down the Black Ben Helicopters. But don't pause for too long, because it's all a play done to convince CYNK-buying financial types that WE ARE ON THIS THING WE HAVE IT UNDER CONTROL DO NOT WORRY about inflation.
Fisher may be taking his role a bit too seriously, because he mentioned the unmentionable in his July 16th speech - tailing off on reinvestment of that 4.5T. Right now they are reinvesting principal and interest proceeds, which far exceeds the theoretical QE that they are tailing off. So until they all start talking about letting that portfolio run off, they are not serious about liquidity constraints. It's just a fireworks display.
But why are they willing to do make fools of themselves in public? They have two huge problems. They don't know how to manage either, much less the two together.
This is the population-adjusted core employment graph. It's the number of the employed among the 25-54s divided by the civilian free-roaming 25-54s population. It is clear we DO have labor slack. Note that there is a considerable degree of part-time employment in there.
Problem 2 is, yea verily, like unto it, an unlovely thing cursed of G_d and man.
This is the ratio of trade receivables (cash coming in) of non-financial corporates divided by total liabilities (what they owe) of non-financial corporates. I have helpfully added the Fed Funds rate indexed on the right. These figures come from the Flow of Funds report.
In short, the Fed response has caused the acceleration of debt-loading of corporates, to the point that they are very susceptible to any increase in interest rates. Since the end of the last recession US corporates have added about 2.4 Trillion in corporate bond debt and over 2 Trillion in credit market debt.
Households have lightened up a bit, but not nearly enough. This is the equivalent graph for Households & Non-profits:
So it is clear that our reckless spending is not going to bail the corporations out, no matter how sapphire the screens get.
The implications are that households and corporations are both extremely negatively sensitive to interest rate increases. They are both extremely negatively sensitive to tax increases. They are extremely negatively sensitive to cuts in government funding.
Now note the long time period these graphs cover. Much has been made of the post WWII expansion, but the population and the business population then had relatively high cash flows in relation to liabilities, which implied that they were extremely favorably responsive to both tax rate cuts (it was a high tax environment) and interest rate cuts.
There was a huge recession in the 50s - one of the most severe ever - and when Eisenhower was building those roads he was funding expansion. When Kennedy showed up, his tax cuts had an impressive pay back.
But now we really don't have much room for tax cuts. We don't have much room for ANYTHING.
All of the financial machinations of the Fed have really done very little to change the long term trajectory of the US economy, which in fact they conceded already. Have you looked at their long term growth forecasts lately? This is their March projection, and here is their June projection. Compare to their June 2013 projection.
So the reason for the Fed-and-Booty Play being enacted in the skies over NYC is that they are trying to talk the markets into anticipating better rates, so that they have the room to raise them without shocking the real economy. I don't think it's going to happen, given the regime in DC.
Absorb this, and then we can go onto the ACA/economic weather forecast thing. You folks may have stronger constitutions, but there's only so much misery I can handle at one time.
Saturday, July 19, 2014
Materials and Strengths
I mean, it's a damnably depressing day when one's reaction to Israel going into the Gaza strip is "Finally!"
I will get back to posting, but first, something that's the opposite of depressing.
It's supposed to go into production soon, and this 3D printer can print carbon-fiber on a matrix.
This is causing me intense positive emotions, and I am going to enjoy just thinking about the possibilities for a few days.
Surely US education is all wrong? We are wasting tremendous sums of money educating a lot of people in skills we don't need, when the basic education to work with such tech is really almost absent. There can never have been a time when a basic technical education can provide any individual with such huge opportunities?
If you have kids, getting them into this sort of thing very early - late elementary school to junior high - would be a great investment.
Monday, July 07, 2014
PS: Full-time Jobs Level
Yes, it has recently fallen, but if you look at the little sawtoothed formations that have shown up each year at this time post the GR, that is the effect of education jobs plus SA. Our economy is still top-heavy to government and education, and when those campuses shut down for the summer it looms up in the stats.
So I can't say whether the recent trend to add full-time jobs is still intact or not. It requires a few months.
In service economies, full-time jobs drop off hard after recessions and only recover years later. Only in manufacturing economies do you see the quick fall and quick rebound.
Next, ACA and employment.
Sunday, July 06, 2014
Employment - What Does It Really Say?
The claims that the number of jobs are very favorable economic omens generate skepticism. The details of the report make it look like marginal job creation. Because of the end of school, these may be part-time jobs that really are not substitutions for full-time jobs - seasonal adjustment is very tricky in June.
But even if that is true, this sort of thing is just BS, cubed:
Job growth blew past expectations and the unemployment rate fell to the lowest level since before the financial crisis peaked six years ago, creating a firm foundation for a stronger U.S. economic expansion.It really should ping everyone's nonsense meter, too, because this shortly follows:
The 1.39 million increase in employment over the past six months is the biggest over a similar period since early 2006.What was happening in 2006? We were slipping into an industrial recession, which was consequently followed by the end of the financial cycle in 2007. We all know the rest of the story. . If we had not been in the middle of a large credit expansion in 2006, with PCE being increasingly fueled by funny money borrowing, we would have seen recession much earlier - although of course it would have been much milder.
It's better to take honest recessions as they come rather than trying to go postal, monetarily speaking. But the BIS just tried to explain all that, and word has it that Krugman is still frothing at the mouth and leaping at the windows, so perhaps I should drop that topic for this post.
The problem is that job creation, as is also true for asset valuation, does not serve as a good predictor for economic expansion over the next year. There's usually a late spike in employment figures - it's not even a good six month predictor.
Now one indicator that was favorable until June was the growth of full-time jobs. Unfortunately that did reverse in June, but it may return again in the fall.
This is YoY percent change in three employment indicators - all, full-time, and part-time. It's a bit busy, so:
This is just all and full-time - the green line is all. But you can't see much detail, so:
Between the two you can get a sense of what's what. In earlier times, the US was a highly industrial economy, and employment was more predictive although the changes were sharper. Nowadays, we are a service-heavy economy, and services don't respond to output as much as consumer spending.
If you will refer to the long series and the short series, you can see how absolutely odd the employment shift looked in 2006 - but that's because we didn't need to work. We could all just borrow more money on our houses. So it took a long time to sag out, although doom was clear in 2005.
We do not have the same opportunity this time.
Other things are apparent. There is usually a spike in full-time employment and employment right before the trend shifts. There is often a difference in the initial shift - full-time employment falls whereas that green line (all) hangs in there a bit. I believe that is due to better uptake of part-time jobs rather than better creation of part-time jobs. I do watch for that pattern a bit, although I basically ignore most employment stats when figuring trends.
There is one employment stat I have found predictive - the YoY change in covered jobs from the initial claims database. This one, in a service economy, does seem to have some predictive value. It at least tells you when to get nervous when the rest of it looks a bit dispirited:
Note that in a manufacturing economy, it doesn't. If you look at the short version so you can see more detail:
You can see that it does seem a bit predictive of when the trend is ending and can generally be used to give about a year's warning. Again, this is PERCENT CHANGE YOY, not simple levels.
However I am a bit skeptical of that indicator right now because ACA should be playing a part, and I am not sure how much of a part. The earlier trend in this number you see before downturns is not causative - it's a result of the factors causing the slackening of growth. So my reasoning right now is that this may be showing the result of ACA, and should be less reliable this time.ACA should distort this UP, so it may be more predictive!
What is strongly predictive? Causative factors, such as percent change in real personal disposable income, PCE (we generally consume less if we don't have money), and gross private domestic investment. There are two types of slumps - business-led and consumer-led. Once one half of the slump really gets going it generally will draw in the other.
Now, should I do this? On July 4th weekend? Well, I'm going to, because I have a busy week ahead and I probably won't get to it otherwise, but I'm sorry.
I know this is busy, but basically when these all start to correlate, ya gotta problem. We've had this problem for over a year. GPDI joined the party last quarter.
The reason why we had low inflation was basically that we at a level of economic activity associated with recession. It's one of those economic factors that gets you out of recession, or prevents you from really falling into it, because it increases real disposable personal income. Note that a lot of the spikiness in real disposable personal income has been due to tax changes - timing of dividends and payouts, plus FICA. But the FICA effect has fallen out. Now it's just going to be whatever's going on in the economy - and the employment report did not support any theory that we are all suddenly going to be earning more in a real sense.
GPDI is on the right side of the graph and it's just percent change. It's naturally pretty spiky. Still, aside from fracking, it's hard to figure out how many companies are going to be spending more. Profits aren't good, the money really isn't circulating on the consumer side, export orders are a bit light in many industries, and the business climate can best be described as BOHICA.
I know we are not in an active recession now (in which a majority of these factors knot up around each other and start pulling each other down), because if we were freight would show it, and it doesn't (it did show the decline in the first quarter and then the resurgence). Q1 was just the combination of bad factors in a structurally weak economy. The inventory cycle rolled through, and we got a couple of better months.
But ACA has got to be an additional negative correlating factor, because ACA affects most people who got insurance through their employer, and the changes now afoot pretty much require individuals to pay more for less. This means that statistical real disposable personal income is significantly overstated, and that we are heading into a sustained Keynesian spending tunnel.
The green line (GDPDI) is going to come back up. But I don't expect it to come up that far.
The bottom line is that this expansion is getting old, and without a real surge in income, it sags out and then collapses:
The reason you could have such a big hit in the first quarter was just that growth is minimal, so we are always kind of rotating around the axis of recession.
Friday, July 04, 2014
Happy Independence Day!!!!
We got a shot at it. That's all, and it's a wonderful thing! There isn't much better in life.
I hope you all enjoy the day.
Thursday, July 03, 2014
Not Bad - Update Tomorrow
I will expand tomorrow, but look at the Household survey. Unemployment rates dropped sharply for adult women, for those with just a high school education, and for those with some college but no degree. Unemployment rose a tad for those with a college degree or better.
Unemployment dropped sharply for blacks - thank heaven!!! That rate has been far too high for far too long. Overall a lot of that has been due to a younger population, but enough's enough. ...
Part-time employment rose by 275K compared to an overall monthly gain of 407K.
We have finally escaped the rule of 58, with the emp/pop ratio coming in at 59.0. Finally!!!!