Saturday, July 20, 2013

Weekly Indicators: interest rate spike killing housing rebound edition

 - by New Deal democrat

Monthly data reported in the last week included big drops in housing permits and starts. Because permits are an element of the LEI, that came in flat. Retail sales grew 0.4%, but consumer inflation was up 0.5% due mainly to gas prices, so real retail sales declined slightly. Industrial production was up, as were both the Philly Fed and the Empire State manufacturing indexes.

Let's start this week's look at the high frequency weekly indicators by looking at the Oil choke collar:

Oil prices and usage
  • Oil $108.05 up +$2.10 w/w

  • Gas $3.64 up +0.15 w/w

  • Usage 4 week average YoY up +2.1%
The price of Oil increased further again this week to a new 52 week high. I am still unable to find any rational reason for this. The price of a gallon of gas rose sharply as a result. The 4 week average for gas usage was, for the second time in a long time, up YoY.

Interest rates and credit spreads
  •  5.41% BAA corporate bonds up +0.05%

  • 2.64% 10 year treasury bonds up +0.09%

  • 2.77% credit spread between corporates and treasuries down -0.04%
Interest rates for corporate bonds had generally 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 have spiked back above that high. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012, and are very close to that low again.

Housing metrics

Mortgage applications from the Mortgage Bankers Association:
  • +1% w/w purchase applications

  • +5% YoY purchase applications

  • -4% w/w refinance applications
Refinancing applications have decreased sharply in the last 8 weeks due to higher interest rates to a two year low. Purchase applications have also declined from thier multiyear highs in April, and this week were again only slightly positive YoY.

Housing prices
  • YoY this week +8.5%
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 remained close to its 6 year record.

Real estate loans, from the FRB H8 report:
  • -0.1% w/w

  • +0.2% YoY

  • +2.1% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Money supply

  • -0.7% w/w

  • -1.6% m/m

  • +8.1% YoY Real M1

  • -0.1% w/w

  • +0.6% m/m

  • +5.0% 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.

Employment metrics

American Staffing Association Index
  • 88 down -6 w/w, down -0.3% YoY
Initial jobless claims
  •   334,000 down -26,000

  •   4 week average 346,000 down -5,750
Tax Withholding
  • $106.6 B for the first 13 days of the month of July vs. $97.5 B last year, up +$9.1 B or +9.3%

  • $147.6 B for the last 20 reporting days vs. $135.0 B last year, up +12.6 B or +9.3%
The ASA deteriorated to being flat or negative compared with last year in the last several months. This week's decline was seasonal in nature due to July 4. Daily tax withholding remained in the lower part of its YoY range compared with its YoY average comparison in the last 6 months. Initial claims remain within their recent range of between 325,000 to 375,000, and have flattened out just as they have in the last 3 springs and summers.


Railroad transport from the AAR
  • -8600 carloads down -3.1% YoY

  • +800 carloads or +0.5% ex-coal

  • +2400 or +0.9% intermodal units

  • -6900 or -1.3% YoY total loads
Shipping transport Rail transport has been both positive and negative YoY in the last several months. This week it was negative once again. The Harpex index had been improving slowly from its January 1 low of 352, but has flattened out in the last 5 weeks. The Baltic Dry Index remained close to its 52 week high.

Consumer spending Gallup's YoY comparisons are still very positive. The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. The ICSC has recently been relatively weak, but Johnson Redbook remains close to the high end of its range.

Bank lending rates The TED spread is still near the low end of its 3 year range.  LIBOR rose remains slightly above the new 3 year low it established four weeks ago.

JoC ECRI Commodity prices
  • down -0.25 to 122.88 w/w

  • +3.50 YoY

The sharp rise in interest rates and the sharp decrease in mortgage refinancing have now been joined by a big spike in Oil prices, which is now being felt at the pump. The decline in housing permits and starts show that it is already being impacted. Purchase mortgages have also backed off their earlier improvement. Temporary jobs are also negative YoY again, as are railroad shipments.

Positives include consumer spending, jobless claims, house prices, and bank and money rates. Spreads between corporate bonds and treasuries are also near their lows.

Once again the story remains that coincident indicators are holding up, while the long leading indicators of interest rates, housing, and corporate earnings have turned negative. The only long leading indicator still positive is Real M2. The Oil price spike and continuing sequestration certainly aren't helping.

Have a nice weekend.

Friday, July 19, 2013

OK -- Who's the Joker?

For reasons unknown, I am now receiving direct mail pieces from Judicial Watch and the Heritage Foundation.  In fact, the Heritage Foundation has sent me a membership card to "try it on for size. "

Considering that I basically think the Heritage Foundation is a joke (at best), I can only conclude that someone has signed me up for this as a joke.

So -- who's the joker?


Have a good weekend.  

Failed Narratives: a reply to Barry Ritholtz and Noah Smith

- by New Deal democrat

Barry Ritholtz has a contemplative piece up at The Big Picture called The Narrative Fails. His thesis, borrowed from Cullen Roche, is that:
The economy continues to do okay, the stock market is hitting all-time highs every day, real estate is back on the up and up, interest rates remain very low by historical terms, the net worth of Americans is back at all-time highs, we’ve just dragged ourselves out of the worst recession in 80 years, but people are still upset about a lot of things . . . I have a feeling that there’s more to this general unhappiness than meets the eye. And I think a lot of people are mad because the fear case has totally lost out at this point.
I believe Barry is exactly right - as far as the stock market goes. The anger over any positive data is apparent in the comment section of almost all big economic blogs. Certainly if you click on almost any piece at Business Insider and start reading the comments, the stark raving outrage at any suggestion that the world is not immediately going to hell on a one way ticket is endemic.

So Barry is right about the stock market. Doomers who have been predicting crashes and double dips since just past the market bottom in 2009 (and even those who foresightedly got out of the market before late September 2008, but failed to get back in) have missed completely out on the best returns in nearly two decades.

But I think the positive narrative that focuses on stock market returns has also utterly failed. As it happens, this morning I was again pondering the simple fact that while the economy has been making positive strides ever since mid-2009, it hasn't been good enough. On a per capita rather than overall basis, many if not most markers of individual well-being have stalled out, or at least are well below their pre-recession peaks.

For example, I've put up a number of posts in the last month digging into the issue of average and median real wages. Average real wages haven't improved since 2009, and median wages are no better than they were in 2007.

That, accounting for population growth, employment hasn't nearly returned to its 2007 peak, is well known:

Here's another graph, taken from Doug Short's site, comparing how 4 coincident indicators of the economy: real retail sales, industrial production, employment and real income, have fared since before the recession:

Real sales have made up all of their lost ground, and industrial production nearly so. But employment has only made up about 3/4 of its losses - and that not on a population adjusted basis. And real income still looks very poor, even though it has improved somewhat.

So if the Doomer narrative has failed, so has any notion that a booming stock market in any way reflects the daily tribulations of several hundred million Americans.


And speaking of Failed Narratives, Noah Smith writes today about How normal people see Macroeconomics, saying that "people understand arguments for redistribution but don't understand efficiency arguments," and elaborates that:
observation[s] ... from long experience and countless interactions with friends and relatives and strangers in cafes, blog commenters and op-ed writers and EconoTrolls. Among the things I've noticed are:

1. Normal people talk about economic "schools" much much more than do economists.

2. When normal people talk about the consequences of ... policy..., they often talk about the impact on the rich and poor, the benefits to big banks, and the "fairness" of the policies. In contrast, economists rarely talk about these things.

In a certain sense, the normal people's approach makes more sense than that of the economists.... [T]he impact of any redistribution of our titanic wealth will be enormous. Economists usually try to be impartial, shrugging and saying "Rent is rent!" when confronted with questions of distribution, or pooh-poohing welfare analysis as the province of philosphers and dorm-room discussions. They focus on efficiency because a Pareto improvement is something that everyone can get behind (in fact, that's how it's defined).
And only about 10 comments down, says:
economists usually assume complete markets, so that Pareto efficiency can be defined in terms of money.
Thereby demonstrating exactly why normal people do not share the narrative that he says mosts macroeconomists share.

P.S.: Smith ends the comment above by saying, "I don't much like this approach."


Chile and Peru Keep Rates Steady

From the Chilean Central Bank:

In its monthly monetary policy meeting, the Board of the Central Bank of Chile decided to maintain the monetary policy interest rate at 5% (annual).

International financial conditions tightened, especially those facing emerging economies, mainly responding to signs of an earlier withdrawal of the monetary stimulus in the United States. Recent indicators for the U.S. economy are positive and point to a gradual recovery. The Eurozone continues in recession while growth forecasts for China have been revised downward, as have those for other emerging economies. The prices of foodstuffs and metals, including copper, receded in recent weeks, while fuel prices rose. The dollar showed a widespread appreciation in international markets.

Domestically, incoming information reveals an ongoing slowdown of output and demand, especially in investment. The labor market is still tight. Consumption has remained strong, but the evolution of credit conditions and confidence surveys suggest this variable will lose momentum. Headline inflation approached the tolerance range, as expected, while core measures remain close to 1% y-o-y. Inflation expectations over the policy horizon remain around the target.

From the Peruvian Central Bank:

1. The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.

This decision is based on the fact that the rate of inflation is within the target range in a context of economic growth in the country close to the economy’s potential level of growth amid international financial uncertainty.

The Board oversees the inflation forecasts and inflation determinants to consider future adjustments in monetary policy instruments.

2. Inflation in June recorded a rate of 0.26 percent due mainly to the rise in the prices of some food products and fuels. Inflation in the last 12 months rose from 2.46 percent in May to 2.77 percent in June. Core inflation showed a rate of 0.26 percent (3.38 percent in the last 12 months), and inflation excluding food and energy showed a rate of 0.16 percent (2.35 percent in the last 12 months).

Inflation is expected to converge to the center of the target range in the next months due to the improvement observed in the conditions of food supply, to a pace of growth of economic activity close to the economy’s level of potential output, and to inflation expectations anchored to the target range.

3. Current and advanced indicators of activity show that the growth of the Peruvian economy is close to its long-term sustainable level of growth, even though the indicators associated with the external market still show a weak performance that affects the prices and volumes of export products.

The Chilean ETF broke the strong support at the 58 price level in late May.   Since the the market has continued lower, bottoming on stronger volume in late June.  Currently the market is forming a symmetrical triangle.  While the MACD is rising, it's still in negative territory and the CMF has just turned positive.  However, the overall chart is still bearish and a move higher would have very strong upside resistance.

The weekly Peruvian chart shows that prices have been dropping since the beginning of the year and are no approaching a three year low.   The chart is extremely bearish: the downward trend has been in place for about half a year and we see strong bars printed in the sell-off. 

Thursday, July 18, 2013

The Fiscal Drag of the Sequester

First, the Fed has a great summary of the economy here.  It's included as part of their semi-annual presentation to Congress.

Secondly, the budget deficit is declining in a meaningful way.  

These fiscal policy changes--along with the ongoing economic recovery and positive net payments to the Treasury by Fannie Mae and Freddie Mac--have resulted in a narrower federal deficit this year. Nominal outlays have declined substantially as a share of GDP since their peak during the previous recession, and tax receipts have moved up to about 17 percent of GDP, their highest level since the recession (figure 12). As a result, the deficit in the federal unified budget fell to about $500 billion over the first nine months of the current fiscal year, almost $400 billion less than over the same period a year earlier. Accordingly, the Congressional Budget Office projects that the budget deficit for fiscal year 2013 as a whole will be 4 percent of GDP, markedly narrower than the deficit of 7 percent of GDP in fiscal 2012. In addition, as shown in box figure A, the deficit is projected to narrow further over the next couple of years in light of ongoing policy actions and continued improvement in the economy. Despite the substantial decline in the deficit, federal debt held by the public has continued to rise and stood at 75 percent of nominal GDP in the first quarter of 2013 (figure 13). 

It's very interesting that not one of the supposed deficit hawks has even reported on this development.

Third, the sequester is hurting growth (as most of us in the geek world said it would; see links above):

Fiscal policy at the federal level has tightened significantly this year. As discussed in the box "Economic Effects of Federal Fiscal Policy," fiscal policy changes--including the expiration of the payroll tax cut, the enactment of other tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations--are estimated, collectively, to be exerting a substantial drag on economic activity this year. Even prior to the bulk of the spending cuts associated with the sequestration that started in March, total real federal purchases contracted at an annual rate of nearly 9 percent in the first quarter, reflecting primarily a significant decline in defense spending (figure 11). The sequestration will induce further reductions in real federal expenditures over the next few quarters. For example, many federal agencies have announced plans to furlough workers, especially in the third quarter. However, considerable uncertainty continues to surround the timing of these effects.

Market/Economic Analysis: Brazil

Last Wednesday, the Brazilian central bank raised the interest rate 50 basis points to 8.5%:

Continuing the adjustment process of the basic interest rate, the Copom unanimously decided to increase the Selic rate to 8.50 percent, without bias.

The Committee evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year.

This is the third interest rate increase over the last three meetings, as shown in this chart:

The primary reason for the increase is inflation has stayed stubbornly high yet and has yet to decrease as a result of the recent interest rate increase.

Remember these rate increases are occurring in an environment of slowing economic growth, indicating the central bank is far more interested  and concerned in inflation than growth right now.  More importantly, this is a very negative development, as the central bank must essentially work against national interest in the short run.

Let's turn to the Brazilian charts, starting with the an ETF of the stock market:

The weekly chart really highlights the negative position of the market.  There was strong support in the 46 price area from levels established in mid and late 2012.  Prices moved through these levels -- along with the trend line connecting the mid and late 2012 lows -- earlier this year as it became apparent the Brazilian economy was slowing.  For the last year, the 200 week EMA has provided technical resistance.  The MACD and CMF are now both in negative territory.  The only good news on the chart is the 42.5 level seems to be holding.  However, any rebound from this level will most likely be technical in nature until we see more fundamental developments that presage growth.

The real has a very similar story on the daily chart.  The 18 and mid-18 price level was providing strong technical support from previously  established price levels.  However, recent price action broke these levels, sending prices lower and below the 200 day EMA.  While the MACD has turned upward, it's still in negative territory and the CMF is negative as well.

Usual weekly earnings increase

- by New Deal democrat

One of the five data series of real median wages, Usual Weekly Earnings, was updated this morning for the second quarter of 2013. On an inflation adjusted basis, they rose from $331 to $334. So here's how the last 8 quarters look:

  • 3Q 2011 336
  • 4Q 2011 335
  • 1Q 2012 335
  • 2Q 2012 337
  • 3Q 2012 333
  • 4Q 2012 334
  • 1Q 2013 331
  • 2Q 2013 334

This supports the idea that as gas prices have leveled off in the last year or so, so have real median wages, at their 2007 levels. Stagnation of course is not good, but it's not a decline.

P.S. A few readers commented about energy prices as it related to my post yesterday. The numbers in that post did include all prices including energy costs. Sorry if that wasn't clear. The reference to energy costs was as an explanation for rising median wages during a recession and then falling back after.

Actually, the US Health Care System Isn't That Great

This report should be getting a lot more attention.

The National Institute of Health has done a comprehensive report on the "health" of the US relative to other countries.  Here are there findings:

The report examines the nature and strength of the research evidence on life expectancy and health in the United States, comparing U.S. data with statistics from 16 “peer” countries—other high-income democracies in western Europe, as well as Canada, Australia, and Japan. (See Table.) The panel relied on the most current data, and it also examined historical trend data beginning in the 1970s; most statistics in the report are from the late 1990s through 2008. The panel was struck by the gravity of its findings. For many years, Americans have been dying at younger ages than people in almost all other highincome countries. This disadvantage has been getting worse for three decades, especially among women. Not only are their lives shorter, but Americans also have a longstanding pattern of poorer health that is strikingly consistent and pervasive over the life course—at birth, during childhood and adolescence, for young and middle-aged adults, and for older adults.

The U.S. health disadvantage spans many types of illness and injury. When compared with the average of peer countries, Americans as a group fare worse in at least nine health areas:

  1. infant mortality and low birth weight
  2. injuries and homicides
  3. adolescent pregnancy and sexually transmitted infections
  4. HIV and AIDS
  5. drug-related deaths
  6. obesity and diabetes
  7. heart disease
  8. chronic lung disease
  9. disability 
So -- why is this important economically?

Think about the societal cost of the above data.  With the US obesity rate climbing we'll obviously be paying more for things like diabetes care.  This increases the overall cost of health insurance to everybody.

The reasons for the poor performance are complex.
  • Health systems. Unlike its peer countries, the United States has a relatively large uninsured population and more limited access to primary care. Americans are more likely to find their health care inaccessible or unaffordable and to report lapses in the quality and safety of care outside of hospitals.
  • Health behaviors. Although Americans are currently less likely to smoke and may drink alcohol less heavily than people in peer countries, they consume the most calories per person, have higher rates of drug abuse, are less likely to use seat belts, are involved in more traffic accidents that involve alcohol, and are more likely to use firearms in acts of violence.
  • Social and economic conditions. Although the income of Americans is higher on average than in other countries, the United States also has higher levels of poverty (especially child poverty) and income inequality and lower rates of social mobility. Other countries are outpacing the United States in the education of young people, which also affects health. And Americans benefit less from safety net programs that can buffer the negative health effects of poverty and other social disadvantages.
  • Physical environments. U.S. communities and the built environment are more likely than those in peer countries to be designed around automobiles, and this may discourage physical activity and contribute to obesity.

Wednesday, July 17, 2013

Real median wages rose during the recession for even 4 of the 5 worst performing jobs

- by New Deal democrat

Even E.J.Dionne yesterday repeated the conventional - and incorrect - wisdom about real median wages:
Low- and middle-income workers took the biggest hit in the recession, as a report released recently by the National Employment Law Project showed. Real median hourly wages fell overall by 2.8 percent between 2009 and 2012, but by 5 percent or more in half of the top 10 low-wage occupations.
(my emphasis)

The data, from the National Employment Law Project, calculated that the five job categories that fared the worst in the period between 2009 and 2012 sustained real median wages losses of between -5.0% and -7.1% during that time.

But the truth is, even 4 of these 5 worst-faring job categories did not "take a hit in the recession." Here's how they fared during and after the recession. The first two columns show the change in real median wage during each time period, and the last column shows actual nominal wages:

Job 2007-09 2009-12 2007-12 Nominal
wage increase
+1.0% -7.1% +3.8%
Food prep
+1.2% -5.2% +6.3%
Home health
-1.1% -5.0% +4.1%
care aides
+0.3% -5.5% +5.0%
Maids and
+1.4% -5.0% +6.7%

I've replicated the NELP's methodology in the above table, and confirmed their specific point about real median wages falling for these jobs from 2009 through 2012.

But I'm harping on this because the impression left in all of these articles is that real wages fell during the recession and have continued to fall during the recovery. That isn't what happened. As the above table shows, all but one of even the worst-faring job categories experienced real median wage increases during the recession. That fact is testament to the power of the secular and dramatic rise in the price of gasoline before and at the outset of the recession, it's profound decline beginning in July 2008, and it's strong rebound since 2009.

Obviously we want real median wages to rise, and it is both a problem with sustaining the recovery, as well as the simple well-being of many millions of Americans, that they have stagnated. Part of the issue is that nominal wage increases, which averaged +2.6% a year even during the recession, have slowed to +1.6% a year in the three year period afterward. But what has made a +1.6% nominal increase a real median decrease, more than anything else, is the secular rise in the price of Oil. The simplistic conventional wisdom in analyses like that by E.J. Dionne miss this crucial policy point.

Why Does Anyone Listen To John Taylor Anymore?

At one point John Taylor was a respected economist -- even creating a rule with his name on it.  He has a PhD in economics and teaches at Stanford.  Yet it's obvious that his ideology (he is a contributor to the WSJ editorial page) is getting the better of him when it comes to analyzing this expansion. 

His first mistake is his continued comparison of this expansion to the Reagan expansion -- this despite the clearly different causes (the Reagan recession was caused by a huge spike in interest rates choking off inflation while this recession was caused by a financial crisis).  For more on this error, see here and here.

Now we have this gem, comparing the employment to population ratios of both recoveries. 
Doesn't that look terrible?  The policies of this administration must be causing huge problems!

Unfortunately, Taylor forgets about two trends that are greatly influencing the chart above, making his conclusions at best suspect and at worse malpractice.

The first is the baby boomers, as shown in this chart from the St. Louis Federal Reserve:

As the baby boomers hit their prime earning years, (which would have been right around the 1980s) they entered the labor force to get jobs.  Hence, the huge increase in the employment population ratio in both the 1980s and 1990s.  In fact, one could argue that both Reagan and Clinton benefited mightily from simple demographics.

The second trend was women entering the labor force:

Notice the long climb of the employment population ratio of women in the labor force, which stagnated in the 1980s yet continued moving higher during both the 1980s and the 1990s.

So, a big reason for the increase in the employment to population ratio under Reagan was caused by simple demographics.

And the decrease in the employment to population ratio and labor for participation rate over the last five years is at least 50% caused by the baby boomers retiring.  See this article from the Chicago Federal Reserve, which concluded:

The authors conclude that just under half of the post-1999 decline in the U.S. labor force participation rate, or LFPR (the proportion of the working-age population that is employed or unemployed and seeking work), can be explained by long-running demographic patterns, such as the retirement of baby boomers. These patterns are expected to continue, offsetting LFPR improvements due to economic recovery. 

I sincerely doubt that Prof. Taylor is completely unfamiliar with both the baby boomer concept and women's liberation, or the effect both had on the labor force.  These data points are hardly kept in a vault hidden from public view.  In fact, I would guess that Prof. Taylor is himself a baby boomer.

Several weeks ago I wrote a piece titled, Why Do We Listen To Conservative Economists Anymore?  The bottom line is they've been wrong for the last 4 years in pretty embarrassing ways.  This is simply another piece of evidence against an entire school of thought.

Market/Economic Analysis: EU; the Depression Rolls On

Last week, the EU issued its monthly economic report which showed (unsurprisingly) that growth is still weak.  Let's start with GDP:

The blue line represents total Q/Q GDP growth which has been negative for the last five quarters.  If is wasn't for exports, growth would me much less.

Retail sales (the solid blue line) are still printing negative month over month, although the rate of decline is decreasing.  Consumer confidence (the dotted red line) is still weak.  But there is good news on the PMI front which is almost in expansionary territory.

From other reports we also see major problems.  Industrial production is still below pre-recession levels and continues dropping:

And unemployment is still at high levels and increasing:

Recent EU PMI data has been mixed: while the numbers are good on a relative basis, they indicate the region is still in a recession:

At 48.7 in June, up from 47.7 in May, the final Markit Eurozone PMI® Composite Output Index indicated a further easing in the rate of contraction in economic output to a 15-month low. The reading was below its earlier flash estimate (48.9), however, and signals that overall activity has now fallen in
each of the past 17 months.

June PMI data signalled that the downturns in the manufacturing and service sectors both eased further. Manufacturing output fell only slightly, and at the weakest pace during the 16-month sequence of decline. Meanwhile, service sector business activity contracted at the slowest rate since January.

Here's a chart of the data:

The short version of the above data is we're still in the middle of a depression with  little to no indicating from the powers that be that they have any idea or desire to initiate policies to get out of it.

The latest news from the region is certainly not encouraging.  From Bloomberg:

European car sales slumped to a two-decade low, German investor confidence unexpectedly dropped and euro-area exports fell for a second month, adding to signs that the region is struggling to emerge from recession.

Auto registrations decreased 6.3 percent in June from a year earlier to 1.18 million vehicles, the European Automobile Manufacturers’ Association said today. The ZEW index of German investor and analyst expectations fell to 36.3 in July from 38.5, while economists forecast a gain to 40, according to the median of 37 estimates. Euro-region exports dropped 2.3 percent in May from the previous month. 


The data are “still consistent with the picture that the ECB has, that it will take quite a while until the economy will stabilize,” Jens Kramer, an economist at NordLB in Hanover, said in a telephone interview. “In those countries that are still in deep recession, which is not the case in Germany, the challenges are huge.” 

Tuesday, July 16, 2013

India Raises Two Key Interest Rates To Stem Rupee's Decline

The chart above shows the rupee's ETF.  Over the last two months, it has moved through four different areas of support.  It has slow dropped below the 200 day EMA and taken the traditionally very bearish chart pattern of using the short-term EMAs as technical resistance.  The total drop amounted to a little under 12% from peak to trough.

Yesterday, the Reserve Bank of India took action, raising two key interest rates.  Here is their policy announcement:

The market perception of likely tapering of US Quantitative Easing has triggered outflows of portfolio investment, particularly from the debt segment. Consequently, the Rupee has depreciated markedly in the last six weeks. 

Countries with large current account deficits, such as India, have been particularly affected despite their relatively promising economic fundamentals. The exchange rate pressure also evidences that the demand for foreign currency has increased vis-a-vis that of the Rupee in part because of the improving domestic liquidity situation.

Against this backdrop, and the need to restore stability to the foreign exchange market, the following measures are announced:

  •  The Marginal Standing Facility (MSF) rate is recalibrated with immediate effect to be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate will now be 10.25 per cent.
  • Accordingly, the Bank Rate also stands adjusted to 10.25 per cent with immediate effect.
  • The overall allocation of funds under the LAF will be limited to 1.0 per cent of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as Rs.75,000 crore for this purpose. The allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling. This change in LAF will come into effect from July 17, 2013.
  • The Reserve Bank will conduct Open Market Sales of Government of India Securities of Rs.12,000 crore on July 18, 2013. Details of the securities included for the OMO sale auction will be announced through a separate press release tomorrow.

The Reserve Bank will continue to closely monitor the markets, the liquidity situation and the macroeconomic developments and will take such other measures as may be necessary, consistent with the growth-inflation dynamics and macroeconomic stability.

Bloomberg explains the moves:

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets. Bond yields and the rupee surged.

The central bank announced the decision late yesterday after Governor Duvvuri Subbarao earlier in the day canceled a speech to meet the finance minister. The RBI raised two rates by 2 percentage points, and plans to drain 120 billion rupees ($2 billion) through open market sales of government bonds


The central bank increased the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent, it said in a statement on its website. The monetary authority said it will conduct open market sales of government bonds worth 120 billion rupees on July 18, a step to drain cash from the economy.

“These moves will not only push up interest rates but also lead to tightened liquidity conditions,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “It’s quite surprising that the central bank has used these measures to support the rupee at a time when the economy is in such a bad state.”

Five measures of median wage stagnation

- by New Deal democrat

Have real wages been stagnating or actually declined? I've been following up with research as to that issue for several weeks. I've already examined four measures of average real, inflation adjusted wages, which showed stagnating to slightly rising wages since the turn of the Millenium.

But what about median wages, i.e., the wage earned by those exactly in the middle of all wage earners? In this post I'll examine specifically median measures, one from the Social Security Administration, measured two ways, and three from the Bureau of Labor Statistics. As it turns out, whether median real wages are declining or not depends very much on your starting point. To cut to the chase, I found that

1. The stories that claim that real median wages have declined during the recovery are correct, but
2. Those same measures show that median wages actually rose during the great recession, and by roughly the same amount, and for the same reason.
3. Meaning that median wages measured from any period from 2007 or earlier up until the start of the Millenium have generally stagnated.

Now let's dig into the details. The Social Security Administration measures annual net compensation from actual W-9 tax withholding forms. Since this method means that the result is subject to change based on the total hours worked (remember that in the recession we lost 6% of jobs, but almost 10% of aggregate hours), I have deduced a second measure that adjusts by the average work week in the private nonagricultural sector. Since we don't know if the hours lost were proportionate across all income classes, this is only an approximate measure, but it does give us a closer measure of the actual median hourly wage.

The Bureau of Labor Statistics, which conducts the household employment survey, reports "usual weekly earnings" for full time workers each quarter. Separately, it also keeps track of occupational employment statistics which are reported annually. Finally, I have also included the BLS's Employment Cost Index which is also released quarterly.

Here's the table of all five calculations. Remember that all measure the median, i.e., 50th percentile, and all are adjusted for inflation. The peak in wages is bolded. One series shows a bottom, and that is italicized:

Year Social
Hrly adj'd
Soc Sec
Usual weekly
Cost Index
1999 27,164 15.19 --- --- ---
2000 27,374 15.33 --- --- ---
2001 27,713 15.65 --- 16.78 116.3
2002 27,784 15.78 --- 16.95 117.2
2003 27,657 15.77 --- 16.91 118.0
2004 27,903 15.91 785 16.80 117.3
2005 27,331 15.58 774 16.71 116.3
2006 27,832 15.82 774 16.80 116.8
2007 27,984 15.91 778 16.70 115.9
2008 27,468 15.66 778 17.22 119.7
2009 27,584 15.98 801 17.12 117.9
2010 27,382 15.80 797 17.13 118.1
2011 26,963 15.44 781 16.86 116.6
2012 --- --- 778 16.71 116.7
2013 Q1 --- ---769 --- 117.3

The decline in each series from peak to trough is -3.6% for Social Security, -3.4% for hourly adjusted Social Security, -4.1% for usual weekly wages, -3.0% for the employment estimates, and -2.6% for the Employment Cost Index.

Note the oddity that, once we adjust for hours worked, all 4 data series collected by the two agencies show peaks in the teeth of or at the end of the worst recession in 70 years! This is not what we would expect. It has long been my contention that the price of gasoline has been a strong determinant of the consumer economy since it started to rise secularly over 10 years ago. So what happens when we add a further adjustment for the price of gas? Unfortunately only one of the five measures, the Employment Cost Index, is available in graph form at the St. Louis FRED, but the below graph compares it (in blue) with changes in the price of gas (red):

As you can see, the two lines are virtually mirror images. Now let,s a look at a table of all five measures using inflation ex-energy:

Year Social
Hrly adj'd
Soc Sec
Usual weekly
Cost Index
1999 25,945 14.60 --- --- ---
2000 26,337 14.84 --- --- ---
2001 26,663 15.15 --- 16.04 111.2
2002 26,593 15.19 --- 16.31 112.7
2003 26,719 15.33 --- 16.35 114.1
2004 27,041 15.51 767 16.41 114.6
2005 27,195 15.60 765 16.51 114.9
2006 27,471 15.71 765 16.39 115.4
2007 27,704 15.85 778 16.70 115.9
2008 27,714 15.90 760 16.82 116.9
2009 27,116 15.80 793 16.95 116.7
2010 26,972 15.66 794 17.06 117.6
2011 26,963 15.44 781 16.86 116.6
2012 --- --- 777 16.71 116.5
2013 Q1 --- ---769 --- 117.3

With one exception, the peak in wages is moved forward in time, and in three cases, the peak comes just after the end of the recession. This tells us that the big decline in gas prices during the middle of the recession had a big effect on the measure. Still, the big subsequent rebound in gas prices did filter through the economy and real wages failed to keep up, causing significant declines between 2010 and at least 2010.

At the same time, it is noteworthy that the measures of usual weekly wages, employment estimates, and the Employment Cost Index show that wages are equal to or above what they were when gasoline first hit $3 a gallon in 2007. This is more evidence that the 2007-2009 increase and the subsequent 2009-2012 decline had everything to do with the decline of gasoline from $4.25 to $1.40 a gallon and its subsequent rebound to $3.90 during those respective periods.

The above tables give annual values. But two of the series, Usual Weekly Wages and the Employment Cost Index, are measured quarterly. So we can get a much more granular look if we examine the quarterly measures from those two series. The below table does that, starting with the first quarter of 2007:

Quarter usual weekly
ECI --- usual weekly
earnings ex-gas
ECI ex-gas
Q1 2007 336 118.5 329 117.1
Q2 335 118.1 329 117.3
Q3 336 118.2 331 117.5
Q4 332 117.7 329 117.5
Q1 2008 335 117.4 333 117.6
Q2 335 116.7 336 117.7
Q3 331 115.6 335 117.4
Q4 340 118.8 335 117.5
Q1 2009 344 120.0 335 117.4
Q2 345 119.7 336 117.3
Q3 345 119.1 338 117.4
Q4 344 118.6 338 117.3
Q1 2010 344 118.9 339 117.8
Q2 342 119.5 336 118.1
Q3 342 119.6 337 118.2
Q4 342 119.2 338 118.5
Q1 2011 338 118.3 336 118.2
Q2 336 117.6 336 118.0
Q3 336 117.2 337 117.6
Q4 335 117.3 335 117.5
Q1 2012 335 117.2 335 117.5
Q2 337 117.5 336 117.3
Q3 333 117.1 333 117.4
Q4 334 117.3 334 117.3
Q1 2013 331 117.3 331 117.3

Again we see the affect of including or excluding gas prices on real wages. But more importantly, whether or not we include gas both series hit bottom in 2012, and have not declined since then.

So what can we conlude? In the first place, nominal wages haven't fallen. As this graph supplied by the Social Security Administration along with its data above makes clear, average wages have increased but at a slower rate since the recession, and median wages have stagrated or slightly risen:

The below graph measauring the unadjusted Employment Cost Index (red) vs. CPI including gas (green) and CPI ex-gas (blue) shows the same thing:

Similarly, nominal "usual weekl y earnings" have risen from $742 to $769 and Occupational Estimated wages have risen from $15.37 an hour to $16.71 an hour during the period that they have fallen on an inflation adjusted basis, In other words, the first big conclusion is that it isn't so much that wages have fallen, so much as that wages have failed to keep pace with inflation between the recession and 2012, particularly gas prices, which ultimately filtered through the entire economy.

Secondly, the reference point for wages very much makes a difference. It is certainly very true that in all of the above measures, real median wages fell since the end of the recession. On the other hand, every measure that extends through 2012 shows that real median wages were equal to where they were in 2007 just before the recession when gas prices first hit $3.00 a gallon. I have checked for news stories during that time, and as far as I have been able to find, none of the people bemoaning the decline in real wages since then were trumpeting the gain in real wages during the recession! Rather, their stories were about how median wages had fallen between 2000 and 2006 or 2007, which as you can see from the first graph above, occurred for the same reason.

It is interesting especially with the quarterly data to note that the declines in real median wages appeared to stop at some point in 2012 in the Employment Cost Index. The first quarter drop in the usual weekly wages data is certainly a concern, but I suspect that may mark the bottom. As this data will be updated within the next month, I'll keep an eye out for it and report.

In short, in the longer view since the turn of the Millenium, real median wages have stagnated. Gas prices caused them to rise during the recession, and then decline thereafter as the effects of those gas prices filtered through the economy. It may also be that disproportionately low income jobs were lost during the recession (causing the median to rise) and low income jobs have been disproportionately gained thereafter (causing the median to fall).The jury is out on whether that decline has ended. Since average real wages have risen significantly since the beginnng of this year, I am inclined to believe that real median wages will follow, although to a lesser degree.

Finally, note that the above analysis is strictly about wages.I have yet to deal with the nearly 10% declines in income shown by Piketty and Saez, relied upon by David Cay Johnston, and the similar decline shown in the Sentier data followed by Doug Short. I'll turn to that next.

Monday, July 15, 2013

Barry's Sunday Column: We're About To Shoot Ourselves In The Foot By Not Investing In Our Infrastructure

From Barry:

Back in an October 2011 column, we discussed the many ways repairing our fraying infrastructure could help the United States’ economy. Our transportation grid has gotten old and out of shape. The interstate highway system is in disrepair. Bridges are rusting away, with some collapsing now and then. The electrical grid is a patchwork of jury-rigged fixes, vulnerable to blackouts and foreign cyberattacks. The cellular network of the United States is a laughingstock versus Asia’s or Europe’s coverage. Two years later, none of that has really changed.

The argument then was that a major infrastructure repair program would create jobs, keep us competitive with China and improve the security of our ports, energy facilities and electrical grid. And as a fantastic bonus, borrowing costs for funding these repairs were at the lowest levels in a century. Imagine the least costly way to improve and repair our infrastructure imaginable, and that was what was available to us: the deal of the century.

All of the above remains true — except the bit about ultra-low rates. They have begun to move higher as markets anticipate the end of the Fed’s quantitative easing. The most widely held U.S. Treasury, the 10-year bond, was yielding about 2.6 percent late last week — a full percentage point higher than in early May. The 30-year bond, which we tend to think of as the cost of funding infrastructure that will last for decades, has risen almost as fast.

Later in the column, Barry mentions a few areas that could be improved.  I'll simply add that the American Society of Civil Engineers gives us a D+ on our infrastructure.  Here's a link to an in-depth report they provided.

This really is a no-brainer.  Which of course leaves Washington out of the mix entirely. 

Market/Economic Analysis: US

Let's start with a review of last week's news.

The Good

Producer prices came in at .8%: The Producer Price Index for finished goods increased 0.8 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods rose 0.5 percent in May and fell 0.7 percent in April. At the earlier stages of processing, prices received by manufacturers of intermediate goods advanced 0.5 percent in June, and the crude goods index was unchanged. On an unadjusted basis, prices for finished goods moved up 2.5 percent for the 12 months ended June 2013, the largest 12-month rise since a 2.8-percent increase in March 2012.

Frankly, we needed this bump in the M/M numbers.  Consider this chart of the year over year percentage change in PPI:

The year over year rate was declining and getting uncomfortably close to 0%.

The Neutral

The National Federation of Independent Business reported that the optimism index dropped.  Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.

Here's a chart of the data:

Notice this number has been in a depressed state for the entire duration of this recovery for two primary reasons.  First, is depressed demand and the second is the implementation of the ACA, for which we're now just getting initial guidance.

Import prices dropped for the fourth straight month: Prices for U.S. imports decreased 0.2 percent in June, the U.S. Bureau of Labor Statistics reported today, following a 0.7 percent decline in May. In June, a drop in nonfuel prices more than offset increasing fuel prices. The price index for U.S. exports edged down 0.1 percent in June, after a 0.5 percent decrease the previous month.

The reason I'm now putting this in the neutral column is I think the possibility of deflation is starting to become more real and this print -- and the four months of decreases -- is a nit unnerving. 

The Bad


Conclusion: last week's data picture was light, so it's difficult to get a meaningful read from the data.

Let's turn to the markets:

On the daily chart (bottom chart) I've highlighted the last two week's price action which is better shown in the 30 minute chart (top chart).  Notice that we've had strong inter-day movements, but weak price action during the trading session.  Part of this can be explained by the "summer doldrums" -- weak trading as traders take their summer vacations.  However, it's also occurring as the market is approaching previously attained highs,  Ideally, we'd like to see stronger bars on higher volume print at this time, as this would indicate there is a fair amount of momentum and excitement about the rally.

The belly of the treasury curve (3-7 years, IEIs top chart; 7-10 years; IEFs, bottom chart) rebounded last week.  The primary reasons was higher yields attracted central bank buying, as noted by Marketwatch:

The 3-year note now yields more than twice as much as its 2013 closing low of 0.295%, hit May 2. On Tuesday, the notes sold at a yield of 0.719%, the highest sale price since June 2011.

Buyers offered to buy 3.35 times as much debt as was for sale, more than the 2.95 cover recorded last month but below the 2.50 average during the last year.

Indirect bidders, which can include foreign central banks, took down 35.6%, well above the recent average of 26.8% during the previous year. Recent auctions of other maturities have seen similarly strong indirect bids. Direct bidders, which can include domestic money managers, bought 13.0%, below the average of 18.1%. 

The dollar chart shows that we're still in a fairly price range at the low end of prices for the last few years.  Until we see a move below ~21.5 or above ~23, there isn't much to report.