Wednesday, February 10, 2016

Powerline Economic Analysis: Continuing Their Clue Free Ways

     In a post titled "Talkin' Unemployment Blues" Scott Johnson of the Powerline Blog referenced the following chart from "Shadowstats:" 


So, according to Shadowstats, the real unemployment rate is about 22.5%.  This stands in stark contrast to the U6 and U3 rates of unemployment from the BLS:


     For the sake of argument, let's assume SS is correct.  Wouldn't that mean there could be no wage pressure at all?  At that level of unemployment, employees have, literally, no bargaining power.  An employer could say, "there are, literally, 100 people who will take your job."  Yet, as the following chart from the FRED database shows, wages have increased about 2% Y/Y for most of this expansion.  That pace increased a bit over the last 6-9 months, and is now around 2.5%:


I wonder how Mr. Johnson would explain that rather glaring logical inconsistency?  

     This is but one of the many problems with SS numbers.  According to SS, their "alternate" CPI index based on 1980 calculations is ~7.5%.  If that were really the case, the 10-year would now be trading at a -5.75 yield.  (Just to help Mr. Johnson out: the current 10-year CMT was 1.75% at the close of yesterday's trading.   1.75 - 7.5 = -5.75%.  In case you were wondering, that's called "subtraction" which is a basic mathematical function.)  Trust me on this one: if the 10 year were trading at 5.75%, you'd be hearing about it.

     Here's the point.  The guys at Powerline aren't clueless; that description might imply that, at some point, they had a clue.  No: Powerline's writers are economically clue free.   Over the last few weeks, I pointed out that John Hinderaker -- who is now in charge of a conservative think tank -- thinks Minnesota should change economic policies.  This, when the state's unemployment rate is below 4% and wage gains are between 2.5%-5% Y/Y.  And now Scott Johnson is partially basing his argument on Shadowstats -- a website used by, quite literally, no reputable economist.  And this is before we consider that these guys spent the entire 2014 blog year providing economic commentary that was, literally, 100% incorrect.  That's just dumbfounding.  

     This post will have no impact on Powerline.  They'll continue to argue that they are economic geniuses.  And we'll be here to document the latest economic missive from the cluefree crowd at Powerline as they post.



     



      

The big trends of 2015 look like they are breaking down


 - by New Deal democrat

I have a new post up at XE.com .  A whole bunch of important data series moved pretty much in lockstep in 2015.  In the last month, that has broken down.

Tuesday, February 9, 2016

Labor Market Conditions Index forecasts further job softness


 - by New Deal democrat

Last summer I wrote that the Labor Market Conditions Index, a measure based on 19 components which was just reported just barely up +0.4 for January, was a useful addition to the forecasting toolbox.

Sprecifically, it has a 40 year history of signaling a turn in the economy.  Here is the entire history of the index: 



The index has with one exception (1981's double-dip) always failed to make a new high for at least 12 months before the next recession, sometimes much longer than that.  Further, it has always dropped below 0 and stayed negative for 6 months or somewhat more before the onset of the next recession.

Here is the Index over the last 5 years:



The Index appears to have made its cycle high at the beginning of 2012, with a secondary high in early 2014. But it has not turned negative.

Further, when the Index consistently leads the YoY% growth in jobs by 6 - 12 months, but YoY job growth (red) is a much  smoother measure:



Thus job growth serves as an important confirmation for the long leading part of the Index.

But a downturn below 0 in the LCMI, even partnered with a downturn in the growth of YoY jobs, hasn't always meant recession, as in the 1980s and 1990s.  That's where interest rates come into play.  In the 1980s and 1990s, as shown in the graph below (green), a marked increase in interest rates led to the declines in both the LMCI and YoY job growth.  



When that upturn in interest rates abated, the LMCI, and jobs, came back.  It was only when both weakened to the point where the LMCI was consistently negative, before interest rates declined, that a recession ensured.

Here is the same information for the period 2000 - present:


While the "taper tantrum" in interest rates briefly put a dent in the LMCI and YoY job growth, interest rates have calmed down since. In other words, more confirmation that we are probably past mid-cycle, but no imminent threat of an actual downturn.

On the negative side, since the LMCI does lead the much smoother YoY growth in jobs, it strongly suggests that YoY payroll growth is going to decline over the next 6 months or so.  

Six months ago I wrote that such a declien could "only happen if those payroll numbers generally come in under 225,000, and probably even below 200,000 through next winter." 

So here is jobs growth for the last 12 months:



Average growth for the last 6 months has been 218,000 per month. with 3 months upnder 200,000.

The LMCI forecasts that the decelerating trend in job growth will continue, which means I expect average jobs growth during the next 6 months to continue to average under 225,000.