US recession looming?

In the wake of The Fed’s ill-advised rate hike , speculation is growing about a US recession in 2016.

But is this probable? Yes. Parts of the US economy, for example, energy, are already in recession. Meanwhile, the US economy is already slowing and sharply.

Keep in mind that higher interest rates, theoretically, translate into a stronger currency (via covered interest rate arbitrage. As the chart below shows, American exporters are already suffering as the US Dollar strengthens. The red line shows the relative strength of the US Dollar compared to a basket of America’s most important trading partners. The black line shows US exports of good and services. Its clearly falling as the US Dollar advances.

And this recovery is already one of the longest on record. How long can it continue? Some argue not much longer.

While I personally believe the next recession might be very severe, others suggest you should be buying stocks now.

The US economy is teetering

Friday’s news that US GDP slowed markedly in Q4 2015 to 0.7% from a preliminary estimate of 2% was a surprise to many, but the trend was clear from looking at the data. The Personal Consumption Expenditure (PCE) provides an effective measurement of consumption in The United States. In other words, when people buy stuff the money spent rolls up into the PCE. This is important for several reasons, not least of which is consumption drives roughly 70% of the US economy. People stop buying stuff , the economy slows. Its really that simple (if we ignore government spending, which historically surges is US Presidential Election years).

The chart below shows the relationship between the PCE (red) and Business Inventories (black). Inventories are starting to rise indicating people simply aren’t buying as much stuff as they were back in 2011. The last time we saw a collapse in PCE was in 2013 when, coincidentally enough, The Fed embarked on a third round of Quantitative Easing.

Is another round of Quantitative Easing possible?

yes and yes seem to be answers I’m hearing a lot more these days. And I suspect even more so in the months to come. Will the well intentioned but economically damaging Quantitative Easing ever end?

Some don’t think so.

Remember, The Fed’s goal is 3% GDP in 2016. With the global economy continuing to slow, that simply ain’t gonna happen. In fact, concerns are growing that The United States may teeter into recession by the end of 2016.

If inventories continue to rise businesses will cut back. People will be laid off and then consumption will really collapse.

Jobs up but what about wage growth?

The United States reported a fairly decent jobs number today, with a surge of 292K positions added. BLS release is here should you wish to read it direct from The Source.

This is, of course, before the usual revisions. Which generally fail to capture as much public attention as the flash number that was reported today. Regardless, good news if you’re looking for work or perhaps looking to change jobs. Curious, but in spite of several months of positive news on the jobs front, why aren’t wages changing?

Turns out they are, and its very interesting. The two charts below annual changes in wages by education. The first chart clearly shows those holding an advanced degree (i.e., Masters or higher) or a Bachelors degree are seeing NO change in wages.

The second chart shows wage growth for high school graduates or those either with some college or an Associates degree. Here we are seeing changes in wages — UP.

Very curious, but what does it mean? The most reasonable explanation is the economy is creating a large number of lower paid jobs (which is consistent with a lack of overall wage growth), while undergoing some erosion of better paid, higher skilled jobs. Net / net — lots of jobs created, no wage pressure at all, decomposing wage pressure we see declines at the top end, AND a solid number of lower skilled, lower paid jobs being created.

Are you still cheering?

I’ll be looking deeper in the jobs creation puzzle as time and detailed releases of data from The Bureau of Labor Statistics permits.

Something odd here, to be sure. Oh! The TPP won’t help, and, in fact, will pressure wages, pretty much across the board, down. Big Business, on the other hand, supports TPP. Cheaper labour, larger profits, not really a surprise there, now is it?

An already jittery market …

Overnight Chinese markets dropped some 7%, after news that Chinese manufacturing contracted for a 10th straight month.

Some analysts now suggest China – who reportedly contributes between 0.5% to 1% of global GDP – will now drive a global recession in starting in Q2 2016.

Ok, that has looked to me to be the case for a while as the global economy has been slowing for several years. But why might Chinese share prices have dropped so precipitously? One possible explanation (that I personally favour) is heavy handed government intervention during previous sell-offs. The chart below shows the Shanghai markets over the past year. Specifically of interest is the sharp drop of some 32%, from a high on June 5th to July 8th, when regulators banned “large” investors from selling for six months, suggesting they “would deal severely “ with transgressors.

And that ban expires January 8th. Some expect as much as $185 billion of shares to possibly hit markets in due course.

Markets always find a way. And heavy handed government manipulation always backfires.

Oh well, at least in America’s free markets, we have The Plunge Protection Team, who are very, very active in supporting — whoops! stablising, yes stablising the markets.

Ha ha ha, you say tomayto I say tomawto.

Could get exciting.

Working to Live or Living to Work?

The US economy is starting to feel wage pressure, with American median incomes (finally) back to levels last seen before The Great Recession.

So a happy end to 2016, eh? Not really. Even as incomes are rising so are expenditures. The chart below shows how much Americans spend on Health Care and Housing, divided by wages. Effectively, how much from each paycheque goes for the essentials. I’ve calculated this from recession to recession — the vertical gray bars across the horizontal (time) axis.

Its pretty clear that over the past twenty years or so life has been getting more expensive for Americans. Currently some 55% of their pay is going to the essentials; compare to the period immediately BEFORE The Great Recession and you’ll see it was some 50% and before that recession some 46%.

The chart also shows the effect of strong disinflationary forces in the commodity sector across the past two years, with a modest decline. Specifically, in 2011 the essentials cost Americans some 56% of their pay, 2012 55%, 2013 55% and 2014 54%.

Keep in mind health care inflation is running at an eight year high, roughly 5%, with a total cost of about $9K for per person in America.

Do you any money left over at the end of the month?

Depression era crisis in farming?

In spite of stereotypes about the scale and pervasiveness of factory farming, in The United States some 99% of all working farms are family farms, and most farms have annual incomes of less than $350K.

Incomes that are rapidly collapsing, by as much as 50% according to some sources.

Why? The chart below shows the 2015 year to date performance of several agricultural commodities, specifically coffee (-27%), hogs (-27%), wheat (-19%), soybeans (-15%), cattle (-15%) and corn (-9%).

Keep in mind farms may have high fixed costs, perhaps loans used to build infrastructure, that must be paid even as prices and revenue fall.

Low agricultural commodity prices, welcomed by consumers, are helping to drive American farmers into bankruptcy; .

Farmers were the first group to be impacted during the 1930s depression. Is it happening again?

Higher government spending leads to slower growth

ok so US Q3 GDP just revised down to 2.0% from the flash number of 2.1%,. We expect GDP to further disappoint into Q4 2015 and 2016. Why?

The chart below shows the annual change in US real GDP (red line) compared to US Government Expenditures (aka, “spending”) divided by US real GDP (black line). In other words, how much government is spending as a percentage of GDP. Vertical grey bars are periods of US economic recession.

You’ll notice pre-financial crisis while government spending as a percentage of GDP ranged from 24.86% to 29.52%, real growth in GDP averaged 2.6% and 2.7% respectively.

Post financial crisis government spending, as a percentage of GDP, has surged, averaging 37.83%, while read GDP growth has averaged a mediocre 1.2% – yup.

Its pretty simple and illustrated here: increased government spending doesn’t automatically translate into higher economic growth. Rather the contrary. Something we already know and have known, for a long time. When will government catch on?

Well, it gets down to fooling some of the voters some of the time.


and now for some blogging !!
In Q4 2013 a client asked to stop blogging and give them (sell, actually) exclusive rights on the content I’d been creating at I was perfectly happy to directly monetise content, even if it meant changing structure somewhat. The paying client wanted weekly not daily updates, sorta larger, and also changed the blog’s focus somewhat.
Fast forward to Q4 2015 and the client’s interests have changed, so they’re not renewing their exclusivity contract. That means once again I’m free to blog (for free! *sigh*) and will begin regularly publishing over the next few weeks.
Changes: I’ve fallen out of the daily blogging routine, so will likely update less frequently going forward. Also they had be writing some 5K words a week; my “usual” updates are much smaller, so we’ll see how this shakes out.
But overall: a relaunch of

Mixed picture on global inflation

Inflation in New Zealand, inflation in Dubai, low, inflation in Vietnam, low, inflation in India, low, little inflation in China, low inflation in Denmark, low inflation in Australia, low Indonesian inflation, and seemingly low inflation in The United States.

But what about American inflation – can we look deeper? The chart above shows US inflation, first monotonically then broken up as follows: first, overall inflation (CPIAUCSL, black line), compared to Medical Care inflation (CPIMEDSL, blue line), Food and Beverage inflation (CPIFABSL, red line) and Energy inflation (CPIENGSL, yellow line) from June 1st, 2007 – the start of the Credit Crunch – to the present. All series have been based line at the start, the data is captured monthly, Seasonally Adjusted

Across the board, since the onset of The Credit Crunch inflation is relatively subdued, overall running at 3.96%, with medical inflation the highest (7.90%), followed by food (7.28%) and a fall in energy prices of -3.96%. Just ain’t no inflation to be seen.

Most agree that inflation is coming; its just a question of who will be impacted and to what extent, with at least one analyst suggesting ” a 30 percent increase in consumer prices over the next 10 years.” couldn’t be ruled out.

Now you know what I’m holding onto my gold.

Where are the manufacturing jobs?

Lots of happy news in the US media recently about manufacturing in The United States, some suggesting we are the cusp of resurgence, arguing building goods in China no longer makes sense , others suggesting that as the trade deficit is lowered somehow US Manufacturers are “gaining ground”.

However few addressed the real reason why manufacturing jobs are needed – to provide stable, middle class jobs. If there is a “resurgence” where are the jobs? The chart above shows two series – Manufacturing Hires (JTS3000HIL, black line, left axis) and Manufacturing and Trade Industries Sales (CMRMT, blue line, in real dollars, right axis), over the period January, 2000 to July, 2013 with each series captured monthly.

Manufacturing sales are most definitely increasing and have almost rebounded to 2007 levels. However manufacturing employment is moving in the other direction – down. How will it all end?

Not well I suspect. We most definitely are seeing some degree of manufacturing returning to The United States, however this driver of employment is being countered by the rise of robots, with unskilled labor jobs robots performing many unskilled jobs previously held by more expensive – and demanding – humans.

Economist had a great article on robots, particularly on how they are being adapted to work with rather than fully replace humans.

Regardless, any Robotic / Human interaction is subject to European Safety standards, specifically ISO 10218-2:2011, Robots and robotic devices — Safety requirements for industrial robots