Monday, May 22, 2017

Real aggregate wage growth finally overtakes Reagan expansion

 - by New Deal democrat

In my opinion the best measure of how average Americans' situations have improved during an economic expansion is real aggregate wage growth.  This is calculated as follows: 
  • average wages per hour for nonsupervisory workers
  • times aggregate hours worked in the economy
  • deflated by the consumer price index
This tells us how much more money average Americans are taking home compared with the worst point in the last recession.

Let me give you a few examples why I believe that this is the best measure of labor market progress:

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that's clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let's compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let's compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one -- those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy  that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.

In short, people work for the cold hard cash that is put in their pockets, and real aggregate wage growth measures how much more of that they've received.

With that introduction, here is an updated graph of real aggregate wages for the entire past 53 years: 

So how does the current expansion compare with past ones?  Here is a chart I created several years ago showing the real aggregate wage growth in every prior economic expansion beginning with 1964:

* start of series

And here is the graph showing the Reagan-Bush economy of th 1980s. As indicated above, at their peak nearly 7 years after the expansion in wages started, they peaked at growth of +21.6%

The most recent trough for aggregate real wages after the last recession was in October 2009.  We are now 90 months later, and with the strong job reports of the last few months, real wages  have now grown 22.1%:

The present expansion is now only behind the 1960s and 1990s for the best recovery in real aggregate wages in the last half century.

Where this expansion has lagged has been the velocity of wage growth. Even with the recent spurt, the monthly average real aggregate wage growth has only been 0.25%, slightly behind the Reagan era's 0.26%, and only ahead of George W. Bush's 0.20%.

Since the 1970s, only in the late 1990s has real wage growth monthly been over 0.30%. I believe this is because of the disappearance of unions, which gave labor bargaining power,  which in the 1990s was overcome because of the length and strentgth of the tech boom itself, the only period of prolonged labor market tightness in  the last 40 years.

UPDATE: One important modification that can be made to the above data is to adjust for the growth (or lack thereof in the case of the last 10 years in the prime working age 25-54 population.  This gives us real wage growth per capita for the target demographic.

Here's what that looks like over the entire last 53 years:

It's pretty clear that since the 1970s, only the 1990s and the present expansion showed any significant growth at all.

For comparison purposes, here are the 1960s beginning in 1964:

and the 1990s:

and the present:

Measured per capita among the prime working age demographic, the current expansion is slightly better than the 1990s, but lags well behind the 1960s -- but leaves the Reagan expansion in the dust.

Sunday, May 21, 2017

A thought for Sunday: the Left is winning the battle of ideas. The right's own man says so

 - by New Deal democrat

Prof. Arnold Kling, a conservative neoclassical economist who has taught at George Mason University and been affiliated with the Cato Institute, has a post up this morning in which he  reflects upon whether he has changed his mind about anything in view of developments over the last sum of years.  His reply is a notable bellwether:
I think that in general I have become more pessimistic about American political culture .... 
.... What has [ ] transpired ...... from college campuses [is a] view that capitalism is better than socialism, which I think belongs in the mainstream, seems to be on the fringe. Meanwhile, the intense, deranged focus on race and gender, which I think belongs on the fringe, seems to be mainstream..... 
.... The Overton Window on health policy has moved to where health insurance is a government responsibility. The Overton Window on deficit spending and unfunded liabilities has moved to where there is no political price to be paid for running up either current debts or future obligations. The Overton Window on financial policy has moved to where nobody minds that the Fed and other agencies are allocating credit, primarily toward government bonds and housing finance. The Overton Window on the Administrative State has moved to where it is easier to mount a Constitutional challenge against an order to remove regulations than against regulatory agency over-reach.
I would call that a good start. 
That being said, as usual I expect progress will be made one funeral at a time, as the deep, deep red Silent Generation (and primary Fox News demographic) passes this mortal coil.
A postscript. Kling concludes by writing:
Outside of the realm of politics, things are not nearly so bleak. Many American businesses and industries are better than ever, and they keep improving. Scientists and engineers come up with promising ideas.
I wonder if it occurs to him that these sentences completely undercut his ideology.  After all, if evil government regulation kills innovation, well, obviously, despite the shifts in the Overton Window to the left, that obviously isn't happening, is it?
Furthermore, if that innovation has been happening during the period of time that the Brookings Institution found, via comprehensive Social Security wage data, that workers from 1983 on made only 1% more in real terms over their entire 30 year prime age careers than the workers who entered their prime earnings age in 1957, then that innovation has not translated into *any* significant increase in the well-being of average Americans over virtually their entire working lifetimes. That is a thoroughgoing and decisive failure, well worth being replaced.

Saturday, May 20, 2017

Weekly Indicators for May 15 - 19 at

 - by New Deal democrat

My Weekly Indicator post is up at

The one noteworthy change was in the yield curve.

Friday, May 19, 2017

On the economy, breathe easy: it's still on autopilot

 - by New Deal democrat

While there has been some nearly nuclear powered political drama in the last two weeks (and I supported Bernie Sanders last year, so that should tell you everything you need to know about my political opinions about that), the opposite is true about the economy. It remains on no-drama autopilot.  Absolutely nothing has happened to change the trajectory it has been on since a year ago.

In that regard, let me remind you that for a few months the Doomers were trumpeting the differences between the "soft data" like confidence surveys and the diffusions indeses of the regional Feds and the ISM, vs. the "hard data" of sales, income, and more than anything else industrial production.

Well, last month the various components of industrial production all moved in lockstep for once.  Here's manufacturing:

That's a very nice uptick!  And here's mining and utilities:

Mining continues its rebound, and for once utilities weren't hugely volatile.

And here's real personal income:

Steady as she goes there.

And here's real retail sales:

Consumers continue to increase spending.

About the only stall in the "hard data" is in the broader total business sales:

Manufacturers' and wholesalers' more volatile  sales (a surge, then a stall)  are the big culprits here:

Certainly not nirvana given continued subdued wage growth as well, but by no means a fragile flower on the verge of implosion.

So for now, breathe easy about the economy. It remains on autopilot, set to "steady as she goes."

Thursday, May 18, 2017

Worth repeating: real median lifetime income has barely budged since 1958

 - by New Deal democrat

The Brookings Institution studied total real earnings over workers' prime employment ages from 25 to 55. making use of the most comprehensive measure available: Social Security payments based on payroll data from 1957 to 2013.

I'll cut right to the chase.  Here's the conclusion:
Adjusting for inflation, the median male worker born in 1958 earned just 1 percent more during his career compared with the median man born 27 years earlier, in 1932.

I am reminded of a line from Billy Joel's song, "Allentown":
Every child had a pretty good shot,
to get at least as far as their old man got.

 This is the most damning evidence I've seen yet that the American Dream has been dying for over a generation now.  And people wonder why the electorate is grasping at straws, hoping for somebody to deliver real economic change.

Wednesday, May 17, 2017

Housing permits and starts: hint of an autumn chill in the air?

 - by New Deal democrat

Yesterday morning's report on April housing permits and starts disappointed.  Does the report have wider significance?

This post is up at

Tuesday, May 16, 2017

Is the "rental affordability crisis" abating?

 - by New Deal democrat

Three years ago HUD warned of "the worst rental affordability crisis ever," citing statistics that
About half of renters spend more than 30 percent of their income on rent, up from 18 percent a decade ago, according to newly released research by Harvard’s Joint Center for Housing Studies. Twenty-seven  percent of renters are paying more than half of their income on rent. 
This is a serious real-world issue. I have been tracking rental vacancies, construction, and rents ever since.  The Q1 2017 report on vacancies and rents was released several weeks ago, so let's take an updated look.

The bottom line is that rent increases have stopped in the last year, and with increased wages, the effect is that rent has become a little more affordable.  Median asking rent was unchanged at $864 in the first quarter of 2017, and is actually down $6 from $870 YoY, a decrease of -0.75%. Median asking rent has not made a new high in a year, as you can see in the below graph: 

Here is an updated look at real. inflation adjusted median asking rents, which similarly show that after setting an all-time record in Q1 2016, rent pressures on household budgets have abated just a bit:

Year Median
Asking Rent
Usual weekly
Rent as %
of earnings

2004 59962995
2013 73477894
2014  76279196
2016  H1859826104
2016 Q3842835101
2016 Q4864843102
2017 Q1 864865100

While vacancies remain tight, the vacancy rate appears to have bottomed over the last two years, so while there is still stress, the level of stress is decreasing a little:

It is worthwhile to note that the CPI for owner's equivalent rent, the major component of inflation, remains near the highest levels in a decade, although it has backed off a little in recent months: 

 There are two other median measures in addition to median asking rent from the HVS:   the American Community Survey and the Consumer Expenditure Survey.  Unfortunately both are only current through 2015.  The below table shows their YoY increases, compared with median asking rent:

SURVEY: ACS        CES      HVS
2009 --------  (817)    -------     ------  (708)
2010  +2.9%  (841)   +1.4%   +2.6% (698)
2011  +3.6% (871)    +4.4%   -0.6%  (694)
2012  +2.1% (889)    +5.2%  +3.3% (717)
2013. +1.7% (904)    +4.3%  +2.4% (734)
2014  +1.8% (920)    +9.2%  +3.8% (762) 
2015  +0.9% (928)    +4.3%* +6.7% (813)
*June 2014-June 2015 all shelter.

Finally , HUD recently premiered a Rental Affordability Index,, using the ACS data. Similar to my chart above, it compares median renter income with median asking rent. Please note, however, that this has only been updated through Q4 of last year: 

Like the median household income data, this shows renters' income bottoming out in 2011-12, and rising since relative to rents as calculated by the ACS.

That gives us the "renatl affordability index" shown below:

I'm not sold on HUD's method, mainly because it relies upon annual data released with a lag. In other words, the entire last year plus is calculated via extrapolation.  I suspect we could get much more timely estimates using Sentier's monthly median household income series, compared with the monthly rental index calculated by Zumper.

But regardless of which method we use, while it continues to appear that apartment rents as a share of renter income are quite high, the crunch has prbably passed peak, and the "rental affordability crisis" appears to be abating at least a little.

Saturday, May 13, 2017

Weekly Indicators for May 8 - 12 at

 - by New Deal democrat

My Weekly Indicators column is up at  This week is "steady as she goes."

Friday, May 12, 2017

This week's jobs and real wage reports continue to show late cycle improvement

 - by New Deal democrat

Let's catch up on some of the jobs information we got this week.

I seem to be nearly alone in my analysis that JOLTS reports from the last year have been largely underwhelming.  The report for March, released earlier this week, doesn't change my opinion.

My perennial complaint has been that job openings aren't necessarily real, and that the more important metric is actual hires.  But now, both are going sideways:

Here's the YoY view, showing the complete lack of progress in the past year:

This looks very late cycle to me.

The story is only a little better on Quits, which have also flattened out:

But quits haven't turned down YoY:

Taken together, this looks very much like the "mature" expansion as of 2006.

Turing to the Labor Market Conditions Index, it has recently turned up:

Last year never got negative enough for me to be really concerned. The recent strength is inconsistent with any imminent downturn in the economy.

 Finally, yesterday I wrote that the recent downturn in gas prices appeared to herald at least a mild resurgence in real wage growth.  This morning's CPI report  means that wages for average American workers rose slightly more than inflation last month, i.e., real wages grew slightly. to a level less than 0.1% under last July's high:

We've had some signs of consumer retrenchment in the last few months, but that may be passing, as evidenced by the increase in real retail sales also reported this morning:

The overall picture remains that of a late cycle expansion.

Thursday, May 11, 2017

Real wage growth looks set to resume

 - by New Deal democrat

Since nominal nonsupervisory wages have been growing at a rate of between 2.2%-2.6% for the last 18 months, all of the variation in *real* wages has been because of changes in the rate of inflation.  And that, in turn, has been primarily due to changes in the price of gas: 

When gas prices plummeted beginning in late 2014, real wages started to rise. When gas prices started to rise again one year ago, real wages went flat, and even declined a little.

This lack of real wage growth is the prime culprit behind the recent downturn in spending, as measured both by real retail sales, and real personal consumption expenditures:

That looks likely to change, and for the same reason: gas prices.

In the last several months, oil prices at first flattened, and in the last several weeks have turned down significantly:

Oil prices are actually *down* now YoY.

Gas prices aren't negative YoY at this point, but have also started down (h/t GasBuddy):

As I've pointed out numerous times over the last few years, gas prices are the chief determinant in the variance in the headline inflation rate.  In the below graph, I've divided the change in gas prices by 16, and subtracted -1.8% for the typical underlying core inflation rate, for the last 20 years:

The relationship isn't perfect, but it's pretty darn good.

Note the recent deceleration in YoY gas prices, now up only about 7%.  That translates to a continued abatement in YoY inflation to just a little over 2%. And that doesn't even count the effect of the downdraft in oil prices last week.

In short, the downturn in oil prices suggests that at least mild real wage growth is about to resume.

Tuesday, May 9, 2017

Credit conditons eased up slightly in Q1

 - by New Deal democrat

Yesterday the Senior Loan Officer Survey results for Q1 were reported, validating the much more timely weekly forecasting of the Chicago Fed Financial Conditions indexes.

This post is up at

Monday, May 8, 2017

Strong growth in labor force participation is correlated with weak realwage growth

 - by New Deal democrat

Prof. Jared Bernstein has a piece in the Washington Post today (and at his blog) noting that, even with much improved unemployment and underemployment rates, wage growth is still subpar.

One item I wanted to add to the conversation is the inverse correlation between the prime age labor force participation rate and wage growth.  As I I've pointed out several times in the last few months, most recently on Friday, more than 1% of the prime working age population has left the sidelines and entered the workforce since the beginning of 2016. This surge of participation has only been equalled twice in the last 30 years -- in 1989 and 1995, as shown in the graph below:

In terms of supply and demand, this surge in participation means a big increase in the supply of potential workers. If the demand for labor has not changed materially, then we ought to expect lower wages to be paid to the new workers hired than would otherwise be the case.

So I created a scatterplot, shown below, of the YoY% change in prime wage labor force participation (left scale) vs. the YoY% change in real wages (bottom scale), averaged quarterly:

While in the middle part of the range, there does not appear to be any relationship, at the more extreme parts of the range, there clearly is.  Big increases in real wages (the far right of the graph) only happen in situations where there is a decline in labor force participation, or at best a slight increase.  Similarly, big decreases in real wages only happen when there is a big increase in labor force participation.

In short, while correlation does not necessarily mean causation, it certainly looks like the surge in labor force participation we have seen since the beginning of last year is part of the reason why nonsupervisory wages have grown so meagerly. 

Saturday, May 6, 2017

Weekly Indicators for May 1 - 5 at

 - by New Deal democrat

My Weekly Indicators post is up at

Despite some flat or faltering monthly data, we are down to only 3 negative high frequency indicators.

Friday, May 5, 2017

Just How Economically Clueless is Ed Morrissey? Pretty Darn Clueless

     Once again, ol' Ed has written about the jobs report.  And, as usual, he complains about the "status quo" job growth that is unimpressive.  

Overall, this looks like pretty good news, but not spectacular and probably not a sign of a coming boom — yet, anyway. Excluding the big miss in March, it’s the weakest report in 2017 by a slight amount, and not a large amount over the maintenance rate for population growth (~125-150K). It’s certainly better than last month, and better than the last quarter of 2016, but it’s not gangbusters

But that's not what the averages say:

The chart above shows the average 3, 6 and 12 month rate of change in total establishment jobs.  The current pace has gone on longer than the Bush expansion (which I'm sure Ed argued was the greatest thing since sliced bread) while maintaining a similar pace.  The current expansion's levels are slightly below the pace of the previous 2 expansion.   

So, we know  (once again) that Ed really doesn't know much about economics.  But that wont' stop him from writing about. 

Scenes from the employment report

 - by New Deal democrat

As I described in my detailed post on the April jobs report, below, almost everything moved in the right direction, and significantly so.  Let me lay out a few graphs to show the longer-term stronger and weaker points.

In the good news department, the U6 underemployment rate has been falling at a good clip in the last few months, and at 8.6%, is about 0.6% from representing a reasonably "full" employment situation:

Part of the U6 calculation is those employed part time for economic reasons.  This isn't down to normal yet, but continues to make good progress:

What is particularly good news is that both the U3 and U6 un- and under-employment rates are falling, even though people in the prime working age demographic are coming off the sidelines in substantial numbers:

The only other times in the last 30 years there has been a 1%+ increase in prime age labor force participation (red line above) were 1988 and 1995.

This *relatively* stout increase in participation is probably an important reason why nominal YoY wage gains for nonsupervisory workers have stalled:

Finally, we still have about 1 million or more people who aren't even bothering to look for work, but would like a job now:

This equates to roughly 0.7% of the prime age population.

In sum, we still need to move this +0.7% off the sidelines and into actual employment, and also add another +0.6% or so from underemployment to complete employment before we can say that the the economy is operating at "full employment." And we are almost 8 years out from the beginning of this expansion, and probably a lot closer to the beginning of the next downturn.  This is simply not an economy that in secular terms is working for the average American.

April jobs report: a blowout -- except (sigh) for wages

- by New Deal democrat

  • +211,000 jobs added
  • U3 unemployment rate down -0.1% from 4.5% to 4.4%
  • U6 underemployment rate down 0.3% from 8.9% to 8.6%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now:  down -74,000 from 5.781 million to 5.707 million   
  • Part time for economic reasons: down -281,000 from 5.553 million to 5.272 million
  • Employment/population ratio ages 25-54: up +0.1% from 78.5% to 78.6%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 from $21.90 to $21.96,  up +2.3% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)
Holding Trump accountable on manufacturing and mining jobs

Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise? 

  • Manufacturing jobs rose by +6,000 vs. the last severn years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs rose by +200 vs. the last severn years of Obama's presidency in which an average of -300 jobs were lost each month
  February was revised upward by +13,000. March was revised downward by -19,000, for a net change of -6,000.  

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were positive with one exception.
  • the average manufacturing workweek rose +0.1 from 40.6 hours to 40.7 hours.  This is one of the 10 components of the LEI.
  • construction jobs increased by +5,000. YoY construction jobs are up +173,000.  
  • temporary jobs increased by +5,800.

  • the number of people unemployed for 5 weeks or less increased by +1,000 from 2,334,000 to 2,335,000.  The post-recession low was set nearly 18 months ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime fell -0.1 from 3.3 to 3.2 hours.
  • Professional and business employment (generally higher- paying jobs) increased by +39,000 and is up +612,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.5 from 106.3 to 106.8 
  •  the index of aggregate payrolls rose by +0.7 from 132.8 to 133.7 . 
Other news included:         
  • the alternate jobs number contained  in the more volatile household survey increased by   +156,000 jobs.  This represents an increase of 2,128,000  jobs YoY vs. 2,237,000 in the establishment survey.    
  • Government jobs rose by +17,00.     
  • the overall employment to population ratio for all ages 16 and up rose +0.1% from  60.1% to 60.2 m/m  and is  up +0.5% Yo Y.     
  • The  labor force participation rate fell -0.1% m/m and is up +0.1% YoY from 62.8% to 62.9%.     

This was an excellent report in almost all respects. Not only were the headlines very positive, but so were most of the internals. Hours rose, aggregate payrolls rose, and the employment to population ratio continue to rise as well. People are coming off the sides maybe not in droves but pretty vigorously -- and they are finding jobs. Involuntary part-time employment is declining sharply.

There were a few pockets of softness, in short-duration employment, which hasn't made a new low in 18 months, and those outside of the labor force but who want a job, which also hasn't made meaningful progress in nearly 4 years (although recently it has declined sharply as well). The labor force participation rate also declined this month.
The other soft spot remains wages, which are only up +2.3% in nominal terms for nonsupervisory workers. This is probably in part due to the YoY increase in prime age participation (up over 1% from ages 25-54 in the last year), which means more competition for available jobs.

So, while this month is very good news, we are still at least 0.5%, and probably more like 1%, from reasonably "full" employment, and wages are still really soft. I will repeat, as I do every month now, that the biggest danger I see in the next downturn, whenever it hits, is that we have the first actual wage deflation since the 1930s.
Postscript: Is this employment report an affirmation of Trump and the GOP? Yes -- if by that you mean that they haven't really done anything to affect the economy as of yet, and so it continues on autopilot.

Thursday, May 4, 2017

Holding Trump to account on manufacturing and mining jobs: setting the benchmarks

 - by New Deal democrat

Tomorrow is the April employment report, and at this point we can begin to hold Trump and the GOP Congress at least somewhat (but not fully for about 3-6 more months) accountable for the trend. For example, by this point 8 years ago, Obama and the Democratic Congress had passed the stimulus program, and the hemorrhaging of jobs, while continuing, gradually lessened before completely turning around 9 months later.

On the campaign trail last year, Trump made some pretty specific promises to bring back both manufacturing and mining jobs. Those promises were a major part of his economic appeal to the working class. So, beginning tomorrow, it's time to start holding him to account.

Today let's set the benchmarks. As noted above, the economy finally started to add jobs at the beginning of 2010. So let's calculate how many jobs were gained or lost in the Obama recovery, as a monthly average, for those 7 years.

Here is the Obama record on manufacturing jobs annually beginning in 2010:

In December 2009, 11.475 million people were employed in manufacturing.  eighty-four months later, in December 2016, 12.343 million people were, for a gain of 868,000, or 10,300 a month.

Now here his the Obama record on coal mining jobs annually beginning in 2010:

In December 2009, 77,700 people were employed in coal mining. After rising to almost 90,000, by December 2016, only 49,700 people were so employed, for a loss of -28,000, or -300 a month.

For Trump to do better than Obama, he needs to add 11,000 manufacturing jobs a month, and simply not lose any jobs in coal mining.

The accounting starts tomorrow.

Wednesday, May 3, 2017

Monthly update on housing and cars

 - by New Deal democrat

First of all, sorry for the lack of posting this week. Occasionally real life intrudes, and so it did for the last few days, demanding my full-time (and more!) attention. Posting should return to nearly normal.

If the consumer economy were really in trouble, the first two places I would expect to see that manifesting is in housing and cars.  Now that the latest monthly results have been reported, we have an updated look.

This post is up at

Saturday, April 29, 2017

Weekly Indicators for April 24 - 28 at

 - by New Deal democrat

My Weekly Indicators post is up at  Stagnant real wages helped make for a punk Q1 GDP report, but the nowcast and the forecast still look positive.

Friday, April 28, 2017

Two hits and a miss on GDP and wages

- by New Deal democrat

We got two pieces of good news from the GDP report this morning, and one piece of bad news for workers.

First, from the important long leading housing sector, real private fixed residential investment rose again to a new post-recession high:

This adds to the generally positive data coming out of that sector.

Second, proprietors income increased:

This is a good proxy for corporate profits, which won't be reported until next month.  It isn't quite as reliable an indicator, but the two generally move in the same direction,

So the two long leading aspects of the GDP report were hits.

This miss was in the Employment Cost Index.  Since this is a median measure, it is not distorted by outsized gains at the top of the distribution.  While this measure rose +0.8% in the quarter, inflation increased at least as much, meaning that median real earnings were stagnant:

Had I used persoal consumption expenditures as my deflator, real wages would actually show a decline.

That inflation has been more than eating up nominal gains in wages for the last three quarters is not good news.

Wednesday, April 26, 2017

Declining positivity of background money and financial indicators

 - by New Deal democrat

The supply, cost, and rationing of money and credit set the background for almost all other indicators.  I take a look at what they look like now over at

Tuesday, April 25, 2017

A high frequency indicator for credit conditions: the Chicago Fed'sFinancial Conditions Index

 - by New Deal democrat

One particularly useful leading indicator that is handicapped by being reported only quarterly, and late, is the Senior Loan Officer Survey. This tells us whether banks have been tightening or loosening credit standards in the preceding quarter. 

It has a 30 year history and has typically reported net tightening about 1 year before a recession, with a fair amount of variability, rapidly intensifying as the recession is about to start, typically showing net tightening about 1 or 2 quarters after corporate profits peak:

But the problem is, for example, that we won't learn about the first Quarter of 2017 for several more weeks.  So I have been looking to find a proxy that is reported on a more frequent and timely basis.  I  have now found it: the Chicago Fed's Financial Conditions Index.

Here is the detailed explanation, according to the Chicago Fed:
The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and shadow” banking systems. Because U.S. economic and financial conditions tend to be highly correlated, we also present an alternative index, the adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions
A zero value for the NFCI can be thought of as the U.S. financial system operating at historical average levels of risk, credit, and leverage. The ANFCI removes the variation in these indicators attributable to economic activity, as measured by the three-month moving average of the Chicago Fed National Activity Index (CFNAI), and inflation, according to its three-month total based on the Personal Consumption Expenditures (PCE) Price Index. As such, a zero value for the ANFCI corresponds with a financial system operating at historical average levels of risk, credit, and leverage consistent with economic activity and inflation.  
Positive values of the NFCI indicate financial conditions that are tighter than on average, while negative values indicate financial conditions that are looser than on average. Similarly, positive values of the ANFCI indicate financial conditions that are tighter on average than would be typically suggested by current economic conditions, while negative values indicate the opposite. 

The NFCI is made up of over a dozen components, including 2 year Swaps and Libor vs. the TED spread, which also are components of the Conference Board's "leading credit index" that is one of the 10 components of the monthly Index of Leading Indicators.

Here is what the Financial Conditions Index, averaged quarterly, looks like compared with the Senior Loan Officer Survey:

This is a pretty close match, except that the Senior Loan Officer Survey's crossover point between tightening and loosening equates to a -0.5 reading on the NFCI.

When we compare the Adjusted Financial Conditions Index with the NFCI, we see that while it is more volatile, it appears to lead by about 6 months:

What this tells us is that background economic conditions tend to move in the direction of credit standards.

Additionally, the Chicago Fed also touts the Leverage subindex of the NFCI as leading GDP:

So in the next graph we can see the AFNCI (blue) compared with the Senior Loan Officer Survey (red) and the Leverage subindex (purple):

Both the AFNCI and the Leverage subindex appear to lead the Senior Loan Officer Survey by a year or more, but are noisy as for example in 1990 and 2001, where at least one of the two had already turned negative, indicating loosening compared with economic conditions, a year before the Senior Loan Officer Survey spiked coincident with recessions.

Putting this all together, the history of the Financial Conditions Indexes suggest that a positive value of the ANFCI or the Leverage subindex, or a reading higher than -0.5 in the NFCI, correlate with a tightening of credit conditions. Values above +0.5 (as adjusted in the case of the NFCI) should put us on higher alert for a recession, and values above +1.0 signal danger, in 1-3 years in the case of the ANFCI or the Leverage subindex, or 1 year or less in the case of the NFCI.

Finally, here is a close-up of the last two years of the weekly values of the ANFCI (blue), the NFCI (green), and the Leverage subindex (purple) [In this graph I have added +0.5 to the NFCI per my comment above]:

Note that the ANFCI did reach above +0.5 for one month two years ago. But all 3 have been below zero for the last six months.  This suggests that when the Senior Loan Officer Survey is reported next month, it is at very least likely to be neutral, and more likely than not will show a slight loosening of credit. In broader terms, it means that we now have a useful weekly indicator that tells us that credit conditions are not forecasting a recession.

I will begin to report this each week.