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.
Sunday, January 17, 2016
Natural Born (Because My Brother Is REALLY Irritating Me)
First, there is no legal support for the idea that there are three categories of citizens under US law - natural born, naturalized at birth by statute, and naturalized by election (acquiring citizenship under the laws of the US by successful application).
AND THAT IS THE ONLY LEGAL ARGUMENT on which the theory that Ted Cruz is not a natural born citizen is really grounded. If it is fatally flawed, then Ted Cruz is a natural born citizen under US law. That is so because he is a citizen by circumstance of birth.
Ted Cruz was born in Canada in 1970. His mother was born in Delaware, attended high school in the US, and attended college in the US. She then went to England to work and either married there or had married here and went with her first husband. There they divorced. While in England she gave birth to her first son, who sadly died. It appears he died in 1966 in England.
Because of all that, it doesn't seem possible that Cruz' mother had met the residency requirements for Canadian citizenship by 1970, when Cruz was born. Not surprisingly, when she returned with her son in 1974 or 1975, Cruz was considered to have been born a US citizen due to having been born to a US citizen.
While there has never been an SC case on the "natural born" presidential eligibility clause, there is plenty of history. Not surprisingly, most of it is on the issue of children born of alien parents on US soil. This is because, under English common law being born in the country gives you birthright citizenship, but in most western nations, citizenship follows the parents' (or parent's) citizenship.
In English common law, the children of foreign parents who were born in territory under the jurisdiction of the British crown were considered British citizens. However, by statute dating back to the 1300s, which pretty much makes it the body of law that was relevant at the time the Constitution was written and ratified, children of British citizens born abroad were also British citizens.
This goes way back. For slightly more objective sources than people who think Vattel claimed that children born in a land to foreign citizens acquire birthright citizenship in that land, try the Congressional Research Service, 2011, which you may find here.
But to expand a little, I suggest you also refer to the Lynch v. Clarke case, decided in 1844, which does in fact include a lot of common law history. As it points out, the children born abroad of British parents were in fact considered British citizens. Thus, the theory that Congress' view that persons such as Ted Cruz do not require naturalization somehow makes them citizens by statute instead of natural born citizens is bizarre, in my view. The laws and views of Congress on this topic have instead been based on the the laws preceding, and in effect, at the time the Constitution became the law of the land.
I suggest you start on page 13, where the topic of citizenship is taken up. There is a pretty definitive coverage of the jus soli issue.
On page 15 ( 248 internal), we reach the question of whether the 1802 act declaring children of American citizens born abroad citizens changed the law:
With regard to the Act of 1802, I do not think the children of our citizens born abroad, are aliens. Not that I subscribe to the argument of complainant's opening counsel, that the terms of the act itself embrace the children of all future citizens. But, as at present advised, I believe it to have been the common law of England that children born abroad of English parents, were subjects of the crown.You may read on at your leisure. But do not omit this section (beginning at the bottom of external page 17, internal page 250), because it is material to the issue of the meaning of "natural born citizen", as understood in law at the time of the Constitution's enactment:
In various statutes which have been enacted from time to time for more than fifty years past, to authorize aliens to take, purchase, hold and convey real estate, the expression used by the legislature in declaring the extent of the rights granted, is that they are to be as full as those of "any natural-born citizen", or of "natural born citizens". ...In other words, the English common law knew two classes of citizens or subjects - those who were citizens or subjects by birth and those who were subjects by "naturalization". The laws of succession and inheritance of real property (real estate) were preoccupied with this issue, because dating from the feudal days, it would have been awkward for England if, as could well have occurred otherwise, the King discovered one day that large sections of British land were now subject to the authority of dukes who were subjects of a foreign king. That is why common law had to be changed in the colonies to allow aliens to inherit real property.
In one statute, passed April 27, 1836, Laws of 1836, chapter 200, the alien was to hold land as fully as if he had been a naturalized or natural born citizen, as if those two constituted all the classes of citizenship known to our laws. In the numerous colonial statutes of naturalization to which I have already referred, the expression which is used, is "natural born subjects." Both expressions assume that birth is a test of citizenship; and the continuance of the language subsequent to the Revolution and to the Federal Constitution, show that the effect of birth continued to be the same as it was before.
Thus, at the time the Constitution was written and ratified, the common law understanding of "natural born citizen" (they couldn't use the word "subject" any more) was a person who was a citizen by right of birth. This is really UNQUESTIONABLE. I would also note that this particular case and the legal reasoning within were cited later when official US legal opinions were requested. May I suggest starting with Wikipedia?
Is there any indication within the Constitution that the framers had anything else in mind?
These are the relevant sections (omitting the Fourteenth Amendment, which obviously came later):
Article I, Section 3:
No person shall be a Senator who shall not have attained to the age of thirty years, and been nine years a citizen of the United States and who shall not, when elected, be an inhabitant of that state for which he shall be chosen.Article II, Section 1:
No person except a natural born citizen, or a citizen of the United States, at the time of the adoption of this Constitution, shall be eligible to the office of President; neither shall any person be eligible to that office who shall not have attained to the age of thirty five years, and been fourteen Years a resident within the United States.It is worth noting that the Constitution, as originally written and as amended, delegates to Congress the official endorsement and selection of the President and Vice President based on the electors' lists. Thus there's a step in there in which, at least in theory, a constitutionally ineligible elected president could not be seated, and an alternate (the VP) chosen.
In Section 8 of Article I, we find that Congress has the authority to determine rules of naturalization:
The Congress shall have power ...Now, right there the thought should occur that, since Parliament had passed legislation in England clarifying (declatory) rules of subjects or citizenry by birth, and since this power is explicitly delegated to Congress in our Constitution, it is very likely that the Framers intended that matters would continue as before, and that Congress would have the authority to clarify who was and was not a citizen by birth in the future.
To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;
The Fourteenth Amendment has probably changed that to the effect that Congress probably doesn't have the power to rule that persons born in the US don't have birthright citizenship.
However, for the purposes of this controversy, there is no internal evidence whatsoever the Founders intended to establish some unique class of natural born citizens having some meaning not then generally understood in common law. They used the term "natural born" because it was an understood term in law; they elaborated no further, because it was understood.
FURTHERMORE, there is internal evidence that the Framers did consider the issue of those born and residing abroad. The key is in the residence qualifications of 9 and 14 years for senators and presidents, respectively. 30 - 9 is 21. And 35 - 9 is 21. The idea was that those born or largely raised abroad who came back to this country and made a life here at their ages of majority (then 21, now 18), were valid candidates.
Finally, should the Supreme Court ever get such a case, I would expect them to see it as a powers case, and unananimously rule that since the Constitution cedes the power of providing for uniform naturalization laws to Congress, it MUST cede to Congress the power of determining to whom citizenship is granted by circumstances of birth. I would also expect at least one of the hapless aged US justices to observe that this matter being first determined by the electorate, and then by Congress, harassing the Supreme Court over the matter is superfluous in the extreme.
And do not trouble your sister any more with this Vattel Law of Nations crap.
First you must read the book, and if you do, you will find that Vattel's theory of citizenship is in fact in contrast to the English common law theory, which he specifically states. Try it!!! Go to Chapter 19.
The citizens are the members of the civil society: bound to this society by certain duties, and subject to its authority, they equally participate in its advantages. The natives, or natural-born citizens, are those born in the country, of parents who are citizens. As the society cannot exist and perpetuate itself otherwise than by the children of the citizens, those children naturally follow the condition of their fathers, and succeed to  all their rights. The society is supposed to desire this, in consequence of what it owes to its own preservation; and it is presumed, as matter of course, that each citizen, on entering into society, reserves to his children the right of becoming members of it. The country of the fathers is therefore that of the children; and these become true citizens merely by their tacit consent.At the bizarre concept that Vattel, who if I am not mistaken was Swiss, is the preeminent authority on English common law, I may only laugh. Indeed, Vattel's rule is that the place of birth does not matter, and that children follow the citizenship of their fathers (now mothers and fathers), although he notes the English exception. Under Vattel's reasoning, Cruz is a natural born US citizen and a natural born Cuban citizen. Under English and US law (Canada follows English common law), Cruz was a Canadian citizen (until he did renounce his citizenship) and a US citizen.
A nation, or the sovereign who represents it, may grant to a foreigner the quality of citizen, by admitting him into the body of the political society. This is called naturalisation. There are some states in which the sovereign cannot grant to a foreigner all the rights of citizens,—for example, that of holding public offices,—and where, consequently, he has the power of granting only an imperfect naturalisation. It is here a regulation of the fundamental law, which limits the power of the prince. In other states, as in England and Poland, the prince cannot naturalise a single person, without the concurrence of the nation represented by its deputies. Finally, there are states, as, for instance, England, where the single circumstance of being born in the country naturalises the children of a foreigner.⚓✪  §215.
Children of citizens, born in a foreign country.It is asked, whether the children born of citizens in a foreign country are citizens? The laws have decided this question in several countries, and their regulations must be followed. By the law of nature alone, children follow the condition of their fathers, and enter into all their rights (§212); the place of birth produces no change in this particular, and cannot of itself furnish any reason for taking from a child what nature has given him; I say “of itself,” for civil or political laws may, for particular reasons, ordain otherwise.
Never again. Get thee hence, Satanic Ranting Engineer! You tried to quote a Swiss who wrote a book about the law of nations in French (which I can read and have READ and you cannot, nyah, nyah, nyah, note my kindness in finding an English version) as an authority on English common law. Worse, he disproves your argument. This is the definition of legal insanity.
I should call you up tomorrow and insist that sometimes current moves from the lower voltage to the higher voltage. And when you say no, it does not, I'll start bellowing that yes, it does, because the English royal house is actually a clan of space lizards. It would make more sense - in their universe, it does!!! I am relatively sure that I would be able to convince Prince Charles that it does.
Your noble qualities are many, but on this topic, they are pretty much buried under a mound of coal. Putrid, flaming coal.
It reminds me of those ancient, wise words;
What do you call it when you kill a man? Homicide!
What do you call it when you kill your father? Patricide!
What do you call it when you kill your mother? Matricide!
What do you call it when you kill your little brother? Pesticide!!!
Wednesday, January 13, 2016
So, What Will This Recession's Shape Be?
This is not an easy question to answer, because the US economy is remarkably more Europeanized than ever before, and the European tactics mean that recessions are slow to form and remarkably persistent when they do form. It would be quite bad for us if that happened.
But I have limited tools with which to analyze this question, because some of the old verities have failed, and now we will have to deal with the new verities, without knowing what they are.
I was going to blog over the holidays, but due to a breakout of viral illness, I spent them hysterically wiping and disinfecting and then doing it all over again a few hours later. This was extremely effective, but time-consuming. And when I wasn't doing this, I just wanted to enjoy a bit of Christmas, not blog about such a topic.
Nor is my primary focus at the current time the economy. My primary focus is the metabolic syndrome/diabetes/arthritis thing (yes, it branched out to chronic inflammation - that is the common factor). There I am doing extremely well, with excellent, excellent results.
But the economy can't be ignored. So, a few days ago I thought I'd ask for other people's thoughts on the recession shape topic. I'll write a series of posts and see if I can get some input that will clarify my own thoughts before I try to make my best speculation.
Yes, we are in recession now. NBER does not date recessions until they show up in employment generally, so they will probably tag it in February, eventually. But the correlated downward spiral has begun.
The most current data is always rail (weekly) and petroleum (weekly).
Here's the final rail for 2015 December:
Carload traffic in December totaled 1,219,443 carloads, down 15.6 percent or 225,477 carloads from December 2014. U.S. railroads also originated 1,179,907 containers and trailers in December 2015, down 0.7 percent or 8,502 units from the same month last year. For December 2015, combined U.S. carload and intermodal originations were 2,399,350, down 8.9 percent or 233,979 carloads and intermodal units from December 2014.The odds of this happening if we were not in recession are, to use a highly technical economic term of art, shit-stompingly low. It is not a momentary phenomenon - 2015 total rail was lower than 2014 total rail. The problem slowly grew worse through the year and then suddenly got explosive late in the year:
There's a little purple 2016 blob on this graph from the AAR website representing the first week of 2016, but look at the blue 2015 trajectory. Somewhere around week 42/43 things just started to slide, and by week 48/49 we were meeting and exceeding recessionary guidelines by achieving combined rail volumes lower than 2013 in addition to 2014. Most of the weakness came from intermodal, which had been running positive YoY, and then threw in the towel at the end of the year.
Petroleum, this week's release:
Until quite recently, the four-week gasoline supply figures said firmly that we were not in recession. They started to turn about with rail in November, and now we are looking at -4.3% YoY, four-week average.
Normally I follow distillate more closely. That is down YoY by a large margin, but the warmer-than-average temps late last year in regions where the most heating oil is consumed makes that figure less reliable. It is, however, down by 12.1% YoY. I would think this equates to at least a 6% trucking drop. It is too much to be just from heating oil. More detail in this document.
It lacks nuance. It is not subtle. This is through November, change YoY.
I expect a turn up in these figures for the first few weeks of the year, but not ENOUGH, if you catch my drift.
These are published every day, and provide an excellent, timely look at what's happening with businesses and payrolls. They are less current looks at the economy than rail or freight, because there's a natural delay between slow-downs or speed-ups in the economy and the business reaction.
The fiscal year begins in October. So October 2015 was the 2016 fiscal year. Here are the Monday, January 11 2016 and Monday, January 12, 2015 reports. These are closest comparable days. Table IV, if you want to look at this.
Through November and December, I noticed that business tax receipts were down. They are now down 8.7% YoY YTD. Withheld employment and income taxes were up, agreeing well with the employment report. I am watching the withhelds for signs of slowing. They don't really seem to as of yet, with the Dec 1 2014/2015 withhelds at 2.8% YoY YTD, and the latest at 2.9% YoY YTD.
The thing to remember about doing this is that these are biased toward larger companies, which remit faster. Small businesses may be doing better - that has seemed to be the pattern through a hunk of the last year.
The latest report is here. The earnings and sales indexes are showing slow slides. The six-month outlook for business conditions is notably down from last year, having fallen from a positive 12 in December 2014 to -14 in December 2015. This was a very small sample, and I will be interested to see what the next report, which is a large sample, will show. It is currently consistent with the idea that small businesses are doing somewhat better than large businesses. Currently this report doesn't show any sharp drop.
The latest report is here. This, if anything, should be slightly biased toward larger businesses in some sectors because it covers business-to-business credit. CMI had showed trouble by November. Led by manufacturing, of course. December overall was a bit better, but manufacturing resumed its slide.
Manufacturing showed a trouble into the contraction zone in September, from which it has not recovered. However in December the unfavorables almost went to neutral - but that was achieved, of course, by contracting credit granted. The YoY sales dropped from 60.1 to 51.9, and credit extended dropped from 63.38 to 55.4. That came close to roughly balancing the YoY unfavorables, which only slid from 50.4 to 49.9. It came at a cost in business activity.
Services did better, but of course the holidays are very good, and one would expect some signs of life from the retail. That improved, but YoY there is clear weakening. Unfavorable factors are at 50.6, which doesn't provide a lot of margin over the next few months.
We seem to be on the wrong end of the credit cycle. When B2B runs out, the banks kick in. But that, too, has its natural limits unless the underlying factors improve.
C&I looks recessionary also. They all do! Interest rates are very low and there isn't room to carry much in the way of losses from defaults. As interest rates go lower, the risk to profits from defaults increases, and we are still at a no-capacity level there. These are from third quarter, btw. These aren't current. These are probably what caused the rail figures in December.
CCs can withstand more. C&I - it's time to pull in the reins. Perhaps that's why Chicago PMI took such a stunning drop. This is painful.
Questions for readers:
If anybody makes it this far! What is your sense? Do things "feel" like a downturn to you? What's your business/part of the world looking like? Are you seeing any green shoots? If you believe I am an ass and a fool, feel free to say so. I would be happy to be convinced of it. You'd be doing me a favor.
Thursday, December 10, 2015
It's August, 2007. In Recession Terms, That Is
The Fed says it's going to raise rates. Maybe it is. If so, this is not going to look very brilliant six months down the line.
Rail has been saying that we were entering the recession zone since last spring. Now it says we are there. There has been a notable weakening in the last five weeks.
CMI started flagging problems last spring also. The last report showed that services had followed manufacturing into the unfavorable-sucking-down-favorables zone. It's not that the sales side is so awful yet - but it is clear that credit to some players will have to tighten, so we've passed the "Heal!" stage. If there were enough strength in the economy, I'm sure it would just heal. But it doesn't seem to be there.
JOLTS is entirely consistent with the shift into negative correlations or with the "Healing pause" theory. But it always is at this stage in the game. Continued claims, the same.
But look at the quarterly services survey. There's a high error bar on this report, which is one reason I always say that we never really know GDP within 1%. There's just no way that it is possible to do so. But it is far more possible to detect whether there are forces that are pushing economic sectors to adapt, and it's easier to get a sense of whether they will be able to do so easily or not.
If you look at the non-seasonally adjust YoY patterns, you see that there's been a significant weakening in strength. That means we can't easily get over the hump that's showing in rail and CMI.
To that I would add the reality that theoretical inflation is so low that SS and DI and so forth recipients won't get an increase next year. It's probable that very few of these households are seeing their actual inflation rate for purchases below 2-3%, so it's going to show up across the economy as additional tightness in next quarter.
There's no indication that inventory clearing is going to help us out of this tight spot. Not at wholesalers:
Manufacturing has been in recession, with no indication that cycle is at an end. Look at the last full report. There aren't any green shoots.
Technically, the Fed's move is of course going to allow rates to clump up if they want to do so. Since the Fed went on its talking jag, rates are converging a bit. Hard to know what it would mean, because the Fed had pretty much whacked the informational side of the market enough times over enough years so it learned to play dead. But one thing we can see - short rates responded; long rates are not going to be talked around at this juncture.
It appears to me that we are at the end of the credit cycle for businesses, and very near it for consumers. Consumers have been borrowing - on the low end, delinquencies are beginning to creep up. But the business problems seen last spring in business-to-business lending are now showing up in the form of rising delinquencies for leases and C&I at banks. Bank delinquencies & chargeoffs.
That's entirely what one would expect, but it is something creditors will need to control before it controls them. In particular, one sees the classic pattern. At the smaller banks, CC and ag are trouble, although in the last quarter leases and C&I jumped into the mix. At the 100 largest, CCs are still historically extremely low, but leases and C&I are beginning to show difficulties.
To that, add the retirement/government transfer constriction next year, and the unfavorables seen in business to business lending, and I don't see how we climb out. The economy has to get a little weaker, but some sectors are too weak now to be able to ride through that "little weaker" period without further negative correlations.
In the last employment report, temporary help was contracting. Over the last month or so fuel supply YoY trends have shifted from healthy expansion to considerable flatness.
While none of these factors are earthshaking in and of themselves, together they seem to be making a firm statement.
I don't believe the multi-unit housing market is going to carry through all of next year, because I think rents have close to topped out and therefore construction will slow a bit. We have plenty in the pipeline, but I think the pace is going to have to come down. Just looking at the last Census report made me think this one's at peak.
Friday, November 13, 2015
The Fed WANTS Us To Think It Will Raise in December
Industrial Production YoY:
That's, um, really encouraging.
Rail (from AAR.org)
We have gone through a seesaw this year, with about the first 18 weeks being decent, then a soft path until week 33, after which things hung in just a bit below last year, and then around week 39 things started falling out and they aren't quitting.
Carloads haven't really worsened from the soft patch earlier in the year, though they had rebounded and then sank again.
Some individuals might think that this suggests that the economy is NOT weathering the manufacturing slowdown.
Trucking peaked in January, a few months after IP peaked last fall. From Truckinginfo.com:
It doesn't look like trucking will pull out a YoY even or better in January. Because, what, precisely, would trucking be shipping?
rail is so slow:
But I gather that retail is supposed to save us because goods are going to be shooting out of the stores so fast!
But retail, except for restaurants and bars, is distinctly so-so right now.
The first thing I thought when I did the first retail graph above was "food costs". Restaurants generally have contracts, and if you have food inflation it delays, and you can get that shift.
But in this second graph below, we see combining retail and food services doesn't look too hot. And so when I saw that, I thought, "Oh, the cross!" Grocery stores are the standout.
And we do see the cross - grocery store sales exceed retail sales in growth patterns YoY. Common at the beginning or just before recessions. Otherwise, not. It's the Death Cross for economic expansions.
Death Cross up close and personal:
Cool that I did that in Christmas colors, right??? I'm sure the retailers are planning major discounts. MAJOR discounts.
So far, I would say that the only reason we are not already in an obvious recession is strikingly easy credit. So now the Fed says it is going to tighten.
Now, I believed that the Fed should have made this first tiny baby step toward normalization in the spring, because at that time I knew we would carry through on credit-fuelled housing and auto sales (esp. light trucks, which go strong and steady in expanding construction).
Now we are in a weaker position, facing winter. Consumer credit usage is up, manufacturing is in a very weak trend, and I suspect housing is a bit long in the tooth. By next spring I am not sure that it won't be stalled.
Housing prices are just too high for first-time purchasers, and some of the structural steps that were taken this year to help them on no/low downpayment purchase mortgages will have mostly worked their way through the system by next June. Multi-unit (apartments) have been good and usually are durable in the pipeline, but some of the underlying data there has been looking like it's getting a bit aged, and will be vulnerable to protracted weakness. Rents have risen a lot, and it will be hard to cut them because of funding, but rents are rising far too steeply for incomes.
I have always believed that recessions only occur when there is no possible path out, and I would have preferred that the Fed kicked the can a bit earlier this year to give us a little bit less impetus so that we'd buy some time this next year. We're getting close to the "no possible path" zone.
According to most the weather people, this winter could be easier. That would help.
There is no raise for SS in 2016. That's going to hurt us. Health insurance is not going to be an asset, and that's a big understatement.
I am not totally certain that we are going into a recession, but now I am convinced that if we do fall in, we are are going to have a very long European-style recession. It's not a very comforting outlook.
Thursday, October 15, 2015
Human Ebola Virus
Yo, Whas Up?
When scientists want to study Ebolavirus, they usually take a sample and run it through a few generations of a host to get good replication. That is, you grab an unfortunate guinea pig, inoculate the poor thing, pull a sample of the virus out after it is really ill, inoculate another, and so on. Within four to ten cycles, you have a virus that is really good at incubating in guinea pigs. You keep this quiet, because the last thing you need is a bunch of PETA people trying to rescue your Ebola-infected guinea pigs. This is not a joke.
This is what we just did in the Zaire outbreak, only with humans, unintentionally, implying that those infected, say after July or August of 2014 have some strains of a quite mutated virus that is now more specialized for humans, and very probably some strains that are mutated to be a little less virulent, thus leaving more carriers.
Second Verse, Same As The First!
They already knew that it took months for the virus to clear from prior outbreaks. They released these people back into the community, only giving some instructions about avoiding nursing and employing safe sex precautions for a few months. Inevitably, some of these instructions weren't followed, and some sexual transmission occurred. I know Sierra Leone arrested at least two men for not following the safe sex instructions.
Only one case has been fully documented - the six-month transmission in Liberia. Note that the unfortunate carrier did not violate the instructions he was given, so he bears absolutely no moral culpability. Again, this was a public health SNAFU. It still has not been fully corrected.
But there's a whole lot that the public wasn't told. First, that survivor had had sex with another woman several times shortly BEFORE he infected the lady who died, and at least once after. They did get a partial sequence out of later testing on his semen, which appeared to match her strain. This is as close as you can get to the gold standard.
HOWEVER, it probably means that the man wasn't infectious when he slept with the first lady, but was when he slept with the deceased. I.E. clinical recurrence, or a waxing and waning of viral levels. This is somewhat supported by the fact that of two semen samples taken about a week apart after the death of the contact, the first was negative by RT-PCR and the second was weakly positive. Thus, WHO's current instructions to survivors probably aren't adequate either - they now call for indefinite safe sex until two tests one week pr one month apart of the semen test negative. This seems doubtful coverage.
As a consequence of the July confirmation of six month sexual transmission, a follow-up study has been initiated, showing that, indeed, viral traces are found in the sperm of at least some survivors for at least nine months. Indeed, for as long as they have been checking:
The preoccupation is still heavily about avoiding stigma, but failure to give adequate early precautions must now have ensured that the public doesn't trust the experts, so more of the same is perhaps not advisable. In fact, it is only the "prejudice" of the local populations affected that have probably prevented quite a bit of potential numbers of infections, and indeed it is only late in the cycle when most of the transmission chains have been broken that such types of transmissions can be picked up in an area in which the disease has been endemic.The men joined the study between two and 10 months after they were infected with Ebola.All those who were tested in the first three months after their illness showed positive results for Ebola in the semen.Four to six months after diagnosis, 65 percent were positive.About a quarter (26 percent) of those tested between seven and nine months were positive.
So Let's Take A Stab At The Numbers:
There are over 16,000 living Ebola survivors (estimated). Not all of them are known, either. If even 10% of them were producing live virus six months out (probably far, far more), then there were 1,600 persons potentially capable of passing it through bodily fluids.
This would lead to a very low, slow run of transmission, but a VERY selective filter indeed. Now you have the virus competing not for virulence, but for persistence. This was what you needed to avoid in the first place. In effect, we have a bred a human strain of Ebola virus, and it isn't the same as the original one any more. Expect the unexpected. It is the only reasonable thing to do.
But it is far more probable that the six month number was 3,000-7,000.
Now, although transmission is just a signal, the mutation war is on for persistence, and that war is being fought in thousands of individual bodies. It is probable that the first sets of mutations occurred during the endemic stage, and now we have thousands of incubators, each evolving their own strains, each strain fighting to survive in the human body over the long term.
They aren't even looking in the right place to find it, either. They should be testing women of child-bearing age, because those women have a natural hormonally adjusted down-regulation of the immune system for about half their monthly cycle, and by testing the flux of antibodies they could tell if the virus is hanging out and resurging. And it is way more likely to resurge if we have long-term carriers and if they get pregnant. Way more likely.
Which Brings Us To The Unexpected Expected British Nurse:
Poor lady. She is in critical condition. Nothing about this is her fault - we can only hope she survives and recovers well. She probably has meningitis or encephalitis. The most likely reservoirs are joints and CNS, and if she had virus in the CNS and got on the plane for an awards ceremony a week before she got ill, the pressure changes may have forced some virus out into her system when her circulating immunities had dropped enough to let it run a bit.
But is this really so rare? I doubt it. Given the little known, and the very great difficulties and dangers of trying to study the virus in situ, it seems likely that she isn't that rare. There have been significantly less than 100 survivors in the west. It's extremely unlikely that she is that one-in-a-thousand chance. She's way more like to be the one-in-thirty chance.
The British are contact tracing, and they have used the experimental vaccine on more than twenty contacts. Obviously they aren't sure that she wasn't contagious to family and the initial medical contacts.
Maybe it's time to throw some real money at this problem! Open up clinics in West Africa, try to really treat the survivors, and do follow-up testing for years on the survivors. If you just test for immunities circulating, you will be able to tell if the virus is still hiding and replicating in their bodies.
If you don't do this, and even if you mass-produce the vaccine, which is obviously the right thing to do, you may miss cases and end up transmitting a really human-adapted virus. Probably through a medical setting! A joint injury, an eye injury, or just pregnancy can reintroduce the human-adapted Ebola strain into a medical setting unpredictably.
Are we willing to take the chance that this will end up in India, China or South America? This one we need to study.
Friday, October 02, 2015
They're Not Going to Be Raising Rates in December
If you look at CMI, the PMIs, and now the employment reports, the economy is sagging now with winter impending. The China situation is not favorable, the international instability is not favorable, and retail is not good.
Rail never did get off the floor this year. It has remained just slightly lower than last year. ATA truck tonnage is saying exactly the same thing as rail - it peaked at the end of the beginning of the year and is just tailing down slightly.
The strong GDP 2nd quarter numbers are just statistical bullshit. The economy is either in a mid-cycle growth recession or in the year before a real significant recession - take your choice. Nor is this a surprise - raising taxes as significantly as we did a few years ago was bound to suck money out of circulation.
There is a very, very strong consistency to current economic reports that indicate no collapse, but a weakening trend that is broadening across the economy and is close to gaining some authority, especially next year, since CPI has granted no increase at all. For lower income people, inflation is more like 10% on average, and next year will be difficult for retailers.
On the bright side, construction is very strong, and auto sales have been holding up very well. So we are not about to collapse, although the economy is not on a strong footing. Credit is holding us up. This could only last for another six months, though.
When one looks at employment, although the Household survey and the Establishment survey differ on numbers, they tell the same tale - a notable weakening over the last two months. The Household numbers show no increase in employment over the last couple of months, and the Establishment survey shows a major drop in pace of job growth - the three-month average change in private employment has fallen from 222 in July to 138 in September, and although it should improve next month, the oomph is coming out of consumer spending.
The only reason that the employment rate is not rising is that the civilian labor force has dropped by about 400,000 since July, with the "Not in Labor Force" number increasing by well over 800,000 since July. That is not a typo.
Say hello to President Trump. It is his if he really wants it. We cannot afford the path we have been on, and there isn't anything the Fed can do to change the basic circumstances.
Tuesday, July 14, 2015
Well, Goodness Gracious, Father Ignatius
If you don't know that limerick, count yourself blessed. I am certainly not going to enlighten you.
NFIB's Small Business report took a frank dive in June. Except for the credit constraints, which are non-existent in this report, it agrees well with NACM CMI. Unfortunately, that agreement implies a poorish third quarter.
This is still one of the "small" samples - the next large one will show up in next month's report.
Sales expectations are sharply lower, reversing the gains of the last couple of years. Actual earnings and sales experienced a very sharp one month fall, thus lowering expectations.
The pricing pressures and compensation pressures continue - outlook fell from 98.3 last month to 94.1 this month. If confirmed by the larger sample next month, the economy is on thin ice.
Hah, I find myself trying to explain this one away. For about half the negatives, if you throw out last month you get a better signal. How's that? However, as with so many of my attempts to explain why economic reports aren't as bad as they seem, the bottom line is that for several months sales expectations have been sharply lower than they were last year at this time (8 and 7 points lower), so throwing this report out as an anomaly is probably not the wisest thing to do.
I'll carry it as a negative uncertainty.
The last JOLTS reported a significant drop in the hiring rate for professional and business services in May. That wasn't a particularly good sign, because openings are high:
When you see a persistent gap open, generally the economy is worsening. This hires category peaked in October - I still have the peak in this business cycle as last November!! The distance between wave peaks is getting too long!
We are definitely not going to get a whole lot of external help in this tight spot. The global economy is worsening with some determination, and China is the major driver. The only bright spot globally is that the Indian monsoon has been quite good to date - better than predicted.
Singapore reported Q2 advance GDP. I still regard it as an excellent indicator for the Asian economy as a whole, and while it had shown signs of weakness before, it is now contracting. Quarterly GDP is reported at -4.6%, with a continuation of the manufacturing contraction, but this quarter services and even construction decided to jump on the contraction train.
I had been reading reports that Singapore high-end commercial rents were falling with rising vacancies, so I am not surprised.
Chinese auto sales (from Trading Economics) show that the theory that consumer demand is going to keep the economy just clipping along are highly, highly suspect: