The United States has what is called a consumer driven economy; in other words spending by consumers provides a significant component of GDP. In America’s case consumer spending accounts for over 70% of GDP and here is a problem: if people aren’t working they aren’t spending. Unemployment in America remains at record highs while [...]]]>

The United States has what is called a consumer driven economy; in other words spending by consumers provides a significant component of GDP. In America’s case consumer spending accounts for over 70% of GDP and here is a problem: if people aren’t working they aren’t spending. Unemployment in America remains at record highs while job creation lags overall, in some sectors such as manufacturing the rate is effectively zero.

The chart above shows total non farm job openings (JTSJOR, black line, % change year on year, measured quarterly reported annually) for the period January, 2002 through Q1 2013. The period was chosen to include two recessions. As the economy recovered from the Early 2000s recession (which ended November 1st, 2001) we can see jobs creation increased steadily, peaking out in July, 2004. From this point jobs creation steadily declined until the US economy entered The Great Recession in December 2007. After the Great Recession ended in June, 2009 once again the economy created jobs steadily, hitting a peak in July, 2010. And from there jobs creation has trended steadily down, is recession far off?

While the media continues an incessant stream of happy news reiterating the mantra “things are getting better”, I try to look at a broad range of indicators to get a true idea of the state of economy. So you think “things are getting better” do you? Enough to quit your job? Perhaps without another [...]]]>

While the media continues an incessant stream of happy news reiterating the mantra “things are getting better”, I try to look at a broad range of indicators to get a true idea of the state of economy. So you think “things are getting better” do you? Enough to quit your job? Perhaps without another lined up? After all, if things are truly getting better, you might be inclined to take some time off, then start your job hunt. Well, the data shows otherwise.

The chart above shows a metric called “Quits”, (JTS1000QUR, black line, measured monthly) from January 2000 to March 2013, with the vertical grey bars indicating recession. We can see between the Early 2000s recession and The Great Recession voluntary separations (aka “quits”) averaged 2.3% of the unemployed. After The Great Recession quits averaged 1.7%, telling us that voluntary separations have dropped some 26%.

Moral of the story? Folks just aren’t quitting their jobs at the same frequency as they did before The Great Recession. Maybe its because they were frightened by the intensity and duration of the recession, perhaps its because they’ve recently found employment after being out of work for a protracted period of time.

Or maybe things aren’t really “getting better”?

The chart above shows US Gross Domestic Product for the period 1973 to 2013 (GDP, thick black line), with recessions indicated by vertical gray bars. For each period of economic expansion I’ve added a flat trend line, essentially identifying the level of US GDP as if the recession had never happened. You’ll notice that [...]]]>

The chart above shows US Gross Domestic Product for the period 1973 to 2013 (GDP, thick black line), with recessions indicated by vertical gray bars. For each period of economic expansion I’ve added a flat trend line, essentially identifying the level of US GDP as if the recession had never happened. You’ll notice that with the exception of the most recent (rightmost) recession, GDP quickly recovers.

But its a curious thing about The Great Recession, which ended in June, 2009 – almost four years later, US GDP is way off track. In fact, US GDP is roughly $1T lower than it should be, if GDP has recovered as quickly as it had during previous recessions.

What’s the difference? We have never intervened in the financial markets like we’re doing now. We have never run such large deficits like we’re doing now. With each round of stimulus The United States is not only running out of financial rope, the increase in GDP is weaker than the one before.

Sure, the stock market is booming, but not the economy. Does stimulus really work?

Most of the happy news about GDP looks at quarterly changes, but a broader perspective reveals a different story. The chart above shows real1 GDP from January, 1947 to the present. I’ve calculated the average GDP for the period of economic expansion in the table below. The present period of expansion is the second [...]]]>

Most of the happy news about GDP looks at quarterly changes, but a broader perspective reveals a different story. The chart above shows real¹ GDP from January, 1947 to the present. I’ve calculated the average GDP for the period of economic expansion in the table below. The present period of expansion is the second weakest on record, surpassing only the early 1980s recovery, which itself was hampered by relatively high energy prices after the 1979 energy crisis, as well as record high interest rates under then Federal Reserve Chairman, Paul Volker.

So what is the cause of the current anaemic economic performance? Of course nobody is totally sure, but the major difference between this and other periods of economic expansion is, of course, the US Government’s interference in the markets and excessively high deficits.

This will not end well.

GDPC1, real GDP, average during period of economic expansion, 1947 to 2013

I’ve previously written about America’s mythical manufacturing revival so here is the latest installment off the back of Friday’s job numbers.

How many jobs were created in the manufacturing sector in April?

Precisely ZERO.

Seems like the sector is driving increases in productivity over increases in employment.

Unemployment is a notoriously controversial topic and The Bureau of Labor Statistics, BLS (unintentionally) complicates matters by publishing no fewer than six instead of one single metric. The media widely publishes U3, or the total unemployed plus “discouraged workers” but ignores broader measures such as U6, which reports all unemployed, as [...]]]>

Unemployment is a notoriously controversial topic and The Bureau of Labor Statistics, BLS (unintentionally) complicates matters by publishing no fewer than six instead of one single metric. The media widely publishes U3, or the total unemployed plus “discouraged workers” but ignores broader measures such as U6, which reports all unemployed, as well as those “marginally attached to the labour force” (i.e., temporary jobs) plus those who are working part time but can’t find full time employment.

Another problem – unemployment numbers month to month are volatile but BLS publishes a series I like to look at that addresses this problem – four month moving averages of US Unemployment, broken down to the state level.

The two charts above present U3 and U6 for all states, tracked as a four month moving averages across the period Q2, 2012 to Q1, 2013. For each chart I’ve baselined the vertical axis at the lowest rate observed, and sorted the remaining states in ascending order. Finally, I’ve identified the US national four month unemployment rate.

Click to expand each image. Regardless of how today’s unemployment number shakes out, remember the underlying data is volatile so sometimes its better to look at a moving average rather a single snapshot result.

A combination of the latest US GDP numbers failing to inspire and The Fed’s waffling on further stimulus (seriously, if the economy were on track they should be talking about decreasing further debt purchases) has led people to begin to question the current policy of relentlessly increasing debt.

Just to clarify things I [...]]]>

A combination of the latest US GDP numbers failing to inspire and The Fed’s waffling on further stimulus (seriously, if the economy were on track they should be talking about decreasing further debt purchases) has led people to begin to question the current policy of relentlessly increasing debt.

Just to clarify things I thought I’d take a look back at overall US borrowings and growth. The chart above shows two series: first, Real Gross Domestic Product (GDPC1, black line) compared with the Debt/GDP ratio coincident with GDP (GFDEGDQ188S, red line), measured quarterly for the period 1966 to 2013. Periods of recession are indicated with vertical grey bars. For each period of growth I’ve presented two numbers – real GDP and the overall percentage of Federal Debt to US GDP.

Wrong. The Fed is buying. But let’s look deeper: the latest news on US housing was promising, with prices gaining some 9.3% YOY in 20 cities. An old expression claims as housing goes so goes the US economy so what’s not to like about this picture?

Unfortunately, much of this growth is being driven [...]]]>

Wrong. The Fed is buying. But let’s look deeper: the latest news on US housing was promising, with prices gaining some 9.3% YOY in 20 cities. An old expression claims as housing goes so goes the US economy so what’s not to like about this picture?

Unfortunately, much of this growth is being driven by direct intervention of the US Federal Reserve in the private mortgage market, specifically by purchases of mortgage backed securities. Last week alone The Fed purchased $13.1B of MBS’, and has been using cash flow generated by these securities to purchase additional MBS’. These interventions have the effect of artificially lowering mortgage rates thus artificially increasing demand. Do these lower rates reflect the true risk / reward profile that lending institutions strive for when offering mortgages? I don’t think so and the bank’s themselves DON’T HAVE TO WORRY, as they have a ready guarantor – The Federal Reserve – who purchases some $40B a month of the all the MBS’ they can create. The chart above shows the scale of The Fed’s intervention meddling. The black line, MBST, shows the dollar value of the securities held by The Fed. From $0 before 2009 they’ve added over $1T of MBS’ in a very short period of time. And even more worrying – since November 2011 after beginning to wind down their positions they once again started adding. Why? You’ve got to wonder.

So yes, its no wonder housing is booming. To the point that some folks are openly speculating about another US housing bubble.

Almost anytime governments interfere in the markets we end up with imbalances.

So where’s the inflation?

As documented in this blog and elsewhere, as one of the policy responses to The Great Recession the United States sharply increased it’s money supply. Generally, as the the supply of money increases so does possibility of inflation. However official metrics of inflation show historically low measures, leading some [...]]]>

So where’s the inflation?

As documented in this blog and elsewhere, as one of the policy responses to The Great Recession the United States sharply increased it’s money supply. Generally, as the the supply of money increases so does possibility of inflation. However official metrics of inflation show historically low measures, leading some to suspect governments of manipulating or otherwise suppressing the truth. While manipulation of single indices calculated by government or private organisations is, of course, a possibilityreality (*cough* the LIBOR scandal), controlling prices across entire global markets is something completely different, I would suggest to the point of impossibility.

The term “soft commodities “ refers to agricultural commodities, compared to other commodities such as metals. The chart above shows the year to date returns of six soft commodities, specifically sugar, wheat, coffee, corn, soybeans and cocoa. Clearly with the exception of cocoa all soft commodity prices are declining to a greater or lesser extent. Sugar, for example, is showing a year to date change of -10.26%, or an annualised rate of roughly -53%, while soybeans are falling at an annualised rate of roughly -0.61%. Cocoa is the only commodity series that is increasing at roughly 16% annualised but that is explained away by a forecasted shortage.

Evidence of deflation? We’ll have to see how pronounced these declines are going forward, but they are hardly supportive of inflation.

Obama has proposed making fundamental changes to the way that various government benefits such as Social Security are adjusted for inflation. Specifically, its been proposed that the existing metric, the Consumer Price Index (CPI) be replaced with a different metric known as “Chained CPI”. What’s the difference?

The chart above shows two series: [...]]]>

Obama has proposed making fundamental changes to the way that various government benefits such as Social Security are adjusted for inflation. Specifically, its been proposed that the existing metric, the Consumer Price Index (CPI) be replaced with a different metric known as “Chained CPI”. What’s the difference?

The chart above shows two series: the Consumer Price Index (CPIAUCSL, black line) and Chained Consumer Price Index (aka, “chained CPI”, SUUR0000SA0, blue line), monthly for the period 2003 to 2013. To make the differences easier to understand I’ve based line each series at 100 in 2003. The vertical grey bar identifies the period of The Great Recession, which ended in June, 2009.

Some observations: across the period in question, CPI averaged about 1.32% higher than Chained CPI. The largest difference, 2.74%, was observed in December of 2012. Over the past year the difference between CPI and Chained CPI averaged 2.16%.

A visual inspection of the graph seems indicate the gap between CPI and Chained CPI is widening and this is supposed by looking at the numbers: before The Great Recession the difference between CPI and Chained CPI averaged 0.75%, while after The Great Recession the difference between the two series averaged 1.96%. Since July of 2012 the difference has been greater than 2%. Further,
in 57 of the 121 months during the period in question the difference was greater than 1%, and it exceeded 2% for 23 of the months.

Clearly by switching to Chained CPI the government will save money, both on a monthly basis but also in terms of the compounding effects of the reduced payments over time. I’m not totally sure why the difference between the two series is widening so I’ll dig deep into this as time permits.

Switching to Chained CPI isn’t a new idea; the switchover was first identified in 1996 by The Boskin Commission. The fundamental idea underlying Chained CPI is that as prices change people switch the goods they acquire, but these qualitative substitutions aren’t properly modeled.

I’ve previously written about what I’ve perceived as a modern day capital strike, something we saw last saw during The Great Depression. Back the President Roosevelt’s actions drove businesses to hoard profits , reportedly due to uncertainty caused by what was perceived as capricious government intervention into private enterprise (sound familiar?). In any case, [...]]]>

I’ve previously written about what I’ve perceived as a modern day capital strike, something we saw last saw during The Great Depression. Back the President Roosevelt’s actions drove businesses to hoard profits , reportedly due to uncertainty caused by what was perceived as capricious government intervention into private enterprise (sound familiar?). In any case, the chart above shows two series: the Velocity of M1 Money Stock (M1V, blue line) and the Velocity of M2 Money Stock (M2V, black line) across two recessions, or the period 2000 to 2013. For presentation purposes both series have been based line at 100 on January 1st, 2000 and are calculated quarterly.

Clearly the velocity of money – wether considering physical money such as M1 or the broader measure known as M2 – has sharply declined, indicating that money isn’t circulating. This is concerning, since a consumer driven economy such as America’s depends upon spending to provide jobs.

The chart above shows two series: Real Gross Domestic Product (GDPC1, black line) and Total Public Debt (GFDEBTN, red area curve). Both are measured quarterly in billions and millions of dollars respectively. Three different recessions, illustrated with vertical grey bars are covered: the Early 1990s recession (July 1990 to Mar 1991), the Early 2000s [...]]]>

The chart above shows two series: Real Gross Domestic Product (GDPC1, black line) and Total Public Debt (GFDEBTN, red area curve). Both are measured quarterly in billions and millions of dollars respectively. Three different recessions, illustrated with vertical grey bars are covered: the Early 1990s recession (July 1990 to Mar 1991), the Early 2000s recession (March 2001 to Nov 2001) and the Great Recession (Dec 2007 to June 2009).

Clearly total debt has been relentlessly increasing across the entire period in question. With the recovery from each recession debt increased as did GDP but each cycle clearly showed diminishing returns compared to the previous. Across all three recessions US GDP only increased by 71%, while total debt soared by 364%.

Does stimulus really work?

Pre credit crunch, many folks acknowledged The United States had what is called a FIRE economy, or one that derives a significant amount of revenue from the FInance and REal estate sectors. Many people have suggested America migrate away a FIRE economy by encouraging economic activity in a more diverse range of sectors. How [...]]]>

Pre credit crunch, many folks acknowledged The United States had what is called a FIRE economy, or one that derives a significant amount of revenue from the FInance and REal estate sectors. Many people have suggested America migrate away a FIRE economy by encouraging economic activity in a more diverse range of sectors. How successful has that been?

The chart above shows two series modelled as area curves as follows: first, Corporate Profits After Tax (CP, the total of the red and brown curves) and Profits After Tax for Nonfinancial Corporate Businesses (NFCPATAX, brown curves) for the period 2002 to 2013. Each series is presented in billions of dollars, measure quarterly but reported in a seasonally adjusted annual rate. The Great Recession, which ran from December, 2007 to June, 2009 is indicated by the grey vertical bar. NB: I can’t source data for Financial Corporate Buinessess, however by looking at overall corporate profits and considering corporate profits for non financial businesses we can get an idea of just how large the FIRE sector of the US economy is. The FIRE sector is represented by the red area curve.

Before The Great Recession 46.44% of the US economy was based on Finance and Real Estate, compared to 47.64% post Great Recession. In other words, after The Great Recession the percentage of the US economy based on The FIRE sector has actually increased. The low of 44% was realised in January 2012. Other data points of interest – the FIRE sector accounted for a little more than 57% to total corporate profits in April, 2003, fell to a low of 44% in January, 2012 and is currently running at roughly 46% to total corporate profits.

So is America really moving away from an economy dominate by Finance and Real Estate? I don’t think so.

Finally, I’ve presented below what data I was able to gather on corporate profits generated by the real estate sector. It is relatively small by comparison to Finance and I didn’t include it in the main presentation since it is only available annually and was not sessionally adjusted. Below: Corporate profits after tax for Real estate and rental and leasing (N3258C0A144NBEA), Millions of Dollars, Annual, Not Seasonally Adjusted.

Corporate profits after tax: Domestic industries: Real estate and rental and leasing (N3258C0A144NBEA), Annual, Not Seasonally Adjusted, 1998-01-01 to 2011-01-01

The chart above shows three series: the U3, Civilian Unemployment Rate (UNRATE, black line), U6, the Total unemployed (U6RATE, blue line) and Total Public Debt as Percent of Gross Domestic Product (GFDEGDQ188S, pink area curve in the background). All data is measured in percentage terms and sampled quarterly.

There are three periods of [...]]]>

The chart above shows three series: the U3, Civilian Unemployment Rate (UNRATE, black line), U6, the Total unemployed (U6RATE, blue line) and Total Public Debt as Percent of Gross Domestic Product (GFDEGDQ188S, pink area curve in the background). All data is measured in percentage terms and sampled quarterly.

There are three periods of interest in this presentation. Before March 2001, from December 2001 to November 2006 and July 2009 onwards. As the chart indicates, these periods span before the Early 2000′s recession, post Early 2000′s recession to the onset of The Great Recession, and post Great Recession . For each period I’ve calculated how much higher U6 (broad unemployment) was on average across compared to U3 (the narrow measurement of unemployment) as well as presented the nation’s debt to GDP ratio.

Clearly the gap between U6 and U3 – how much broader unemployment is above the narrow rate reported by the media – has actually sharply increased, even as the nation’s total debt load surges.

The table below summarises the chart.

We see across the three periods in question, U6 is larger than U3 before the Early 2000′s Recession and Post Great Recession by roughly the same percentage.

Does stimulus really work?

Sometimes its interesting to look at commodity prices not in absolute terms but relative to other assets. More precisely, how gold does it take to purchase one unit of another commodity? The chart above shows the performance of gold relative to other assets for the past three months.

How to read it: looking [...]]]>

Sometimes its interesting to look at commodity prices not in absolute terms but relative to other assets. More precisely, how gold does it take to purchase one unit of another commodity? The chart above shows the performance of gold relative to other assets for the past three months.

How to read it: looking at silver to gold, we see that gold actually strengthened against silver (i.e., previously it cost 0.1880 ounce of gold to purchase one ounce of silver, now it only costs 0.171) while it weakened against the S&P 500 (aka, $SPX , from 0.8781 to 1.1500). Other series: West Texas Intermediate oil ($WTIC) and the S&P Agricultural Index ($GKX).

Retail sales for the first week of April plunged 2.7%, when compared to the first week of March – what’s the driver and we should we care?

It seems the well known sequester and its effect on government spending is starting to bite. But the sequester is taking place in an overall trend [...]]]>

Retail sales for the first week of April plunged 2.7%, when compared to the first week of March – what’s the driver and we should we care?

It seems the well known sequester and its effect on government spending is starting to bite. But the sequester is taking place in an overall trend of state and local governments to cut spending, so the US economy clearly has strong impediments to growth. Retail sales are important since the US has an economy driven by consumer spending and as these expenditures fall an important component of US GDP falls.

The chart above shows two series: Real Retail and Food Services Sales (RRSFS, black line, percentage change from one year ago) and Real Gross Domestic Product (GDPC1, blue line, percent change from previous report) for the period April 1998 to April 2013. Each series is measured quarterly but reported annually. To the eye there is a clear relationship between changes in retail sales and changes in GDP. I decided to explore this further and calculated correlations which are reported in the table below. It seems changes in retail sales leads changes in GDP with a three month lag; in other words, as we see retails sales increase or (in this case) decrease, GDP follows three months later. Not good since GDP is already weak and falling.

Correlation of changes in retail sales & GDP

I’m still looking into the sharp correction in commodity prices we’ve seen over the past few weeks. Interesting to take a longer term perspective. The chart above shows four series since April 2006 as follows: $DJAEN, Dow Jones Energy sub index, -74.35% (black area curve), $DJAIN, Dow Jones Industrial Medials -28.31% (lime area curve), [...]]]>

I’m still looking into the sharp correction in commodity prices we’ve seen over the past few weeks. Interesting to take a longer term perspective. The chart above shows four series since April 2006 as follows: $DJAEN, Dow Jones Energy sub index, -74.35% (black area curve), $DJAIN, Dow Jones Industrial Medials -28.31% (lime area curve), $DJAAG, Dow Jones Agricultural Commodity sub index, +25.50% and the Dow Jones Precious Metals sub index, +72.48%.

The Federal Government isn’t the only US entity with excessive debt. While US states are obliged to balance their budget every year that doesn’t stop them from issuing debt to address budgetary shortfalls. The chart above shows two series: first, state and local government current tax receipts (black line, W070RC1Q027SBEA) compared to the debt [...]]]>

The Federal Government isn’t the only US entity with excessive debt. While US states are obliged to balance their budget every year that doesn’t stop them from issuing debt to address budgetary shortfalls. The chart above shows two series: first, state and local government current tax receipts (black line, W070RC1Q027SBEA) compared to the debt loads of state and local governments (SLGSDODNS, blue line) for the period 1949 to 2013. Both series are measured quarterly in billions of dollars. We see that from the across the series aggregate debt was larger than tax revenue, but only modestly until 1985 when the total issuance approached 200% of revenue. A virtuous combination of paying down debt and increasing tax revenue started to reduce this ratio to a post WWII low of 131% in April 2001.

But from that point issuance surged, with total debt increasing roughly 47% from October 2003 to January 2004, taking the debt to revenue ratio well above 200%. Can they ever pay it back?

In 1841 eight states and the territory of Florida defaulted on their debt. The states has borrowed extensively to finance the development of their infrastructure. Why did they default? They had borrowed far more than their ability to repay their debts, either by means of taxes or land sales.

Can it happen again? Naysayers point to The Federal Government, claiming a default by US states would never be allowed. But could The Federal Government afford to bailout states?

Oh the forces of deflation are strong! What’s happening to commodity prices? In spite of claims about an economic recovery, we’re seeing a broad decline in commodity prices over the past three months. The chart above tracks $DJAEN, a measure of energy commodities (grey area curve in the background), $DJAPR (red line), a measure [...]]]>

Oh the forces of deflation are strong! What’s happening to commodity prices? In spite of claims about an economic recovery, we’re seeing a broad decline in commodity prices over the past three months. The chart above tracks $DJAEN, a measure of energy commodities (grey area curve in the background), $DJAPR (red line), a measure of precious metals prices , $DJAAG (green line), a measure of agricultural commodity prices and $DJAIN (blue line), a broad measure of industrial metals prices.

Sharp declines across the board. Seems like energy is the only commodity that’s increasing. Now this is curious, generally in an economic recovery we see commodity prices surging. And, of course, there are all the stories about America’s “cheap energy”. Rather odd.

The amount of money a business entity has left after all costs have been paid – corporate profits after tax – indicates the overall health of the economy. As these profits grow then businesses are expanding, hiring new workers, and investing in infrastructure.

The chart above shows Corporate Profits After Tax (CP, black [...]]]>

The amount of money a business entity has left after all costs have been paid – corporate profits after tax – indicates the overall health of the economy. As these profits grow then businesses are expanding, hiring new workers, and investing in infrastructure.

The chart above shows Corporate Profits After Tax (CP, black line, percentage change, measured quarterly but expressed at an annual rate) from January, 2000 to the present. This period of time captures the last two recessions, allowing us to make comparisons for each. Since The Great Recession ended in June 2009, we’ve seen corporate profits grow at an annual rate of 2.9%. Compare to the growth in corporate profits after the Early 2000′s recession ended, where growth of 5.4% was observed.

In other words, the growth in corporate profits is only 54% of the rate observed during the Early 2000′s recession. Very, very anaemic and doesn’t bode well for the economy going forward.

And the stock market you ask? The one they say is hitting new highs every week? Might be a tad overpriced.