Leading Indicators still lead GDP still leads Jobs

- by New Deal democrat

Almost 10 months ago Bonddad and I caused a sh*tstorm at the Big Orange Political Blog when we pointed out that most of the items that are reflected in the Leading Economic Indictors showed signs of turning around. We said then, improving Leading Economic Indicators lead to GDP growth, which in turn leads to Job Growth.

Via Jake at Econompix, (and h/t Dr. Donald J. Oswald) we have the following graph of the LEI and GDP for the last 50 years. As Jake acknowledges, the graph clearly shows that LEI does lead to GDP growth, and has so now:


Jake questions whether the relationship is as strong now as in previous recoveries. Certainly if you eyeball the December LEI which is the latest datapoint on Jake's graph, and compare it with YoY GDP for 4Q 2009, it looks weaker. But that may be misleading because typically the quarterly GDP is shown equivalent to the first month of the quarter on graphs, and the LEI continued to surge in the October-December period, from ~+5.0% to ~8.0%.

In this regard, the improvement in LEI in the last year is very different from the "jobless recovery" of 2002-03, in which the LEI only exceeded +5% YoY during one month -- July of 2002, that coincided with one single quarter of GDP growth over 2% (2.3% to be precise), and did not again exceed 5% until July 2003, coinciding with 2.9% GDP growth and the first actual job growth.

In contrast, during the V-shaped recovery from the deep 1982 recession, the LEI went from a -1.4% YoY decline in October 2002 to 7.5% YoY growth in February 2003 and by April were up 10.4% YoY. Job growth started in January 2003 and was strong thereafter. Much like the current strongly positive trend in the LEI as noted above.

If the LEI continue to lead GDP, GDP is also continuing to lead jobs, as this graph of YoY % changes updated through January shows:

In the last 15 years, YoY GDP growth of more than 2.3% has always meant YoY job growth within 6 months thereafter, and 2% YoY GDP growth has coincided with monthly job growth.

The KISS indicator of a positive yield curve + underlying inflation indicates that we continue to be on course for good economic growth in the first half of this year. We are probably going to show positive GDP growth in excess of 2% YoY this quarter, and depending on revisions, could be close to 3% YoY.

Further, the "holy grail" of real retail sales continues to improve:


About the only negative indicators for jobs that remain are the ISM non-manufacturing index and the continuing slide in commercial real estate and state and local government budget stress. Meanwhile, the Case-Schiller housing index gets reported tomorrow, and a little-noticed but important metric has reversed course. More on those later.

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Market Mondays

Last week we saw the market rally. Note the overall uptrend (line A). Also note prices gapped higher at the open on two days (B) and that prices used the EMAs for technical support throughout the week (C).


Risk taking returned, as the small cap stocks outperformed the large caps. Note the microcap stocks moved through two points of resistance (A) and (B). In addition, note the strength of the rally (C) -- there are several gaps higher and multiple days of increases. The only drawback to the rally is the lack of volume.


The transports confirm the rally. Note that prices moved through resistance levels A and B. In addition, the rally (outlined by C) had several strong bars and one gap higher. However, like the microcaps, there is a lack of volume.

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Weekly Indicators: Daily Treasury Statement edition

- by New Deal democrat

I wonder if Trim Tabs will write a report on what the Daily Treasury Statement is showing so far this month? Details below.

Monthly data showed more strong gains in industrial production, as manufacturing is indeed having a V-shaped recovery. The Empire State and Philly Fed indices were also good. Housing starts and permits were higher than expected, and are positive year over year now (another data point that pessimists won't be able to cite anymore). Producer prices increased more than expected, but consumer prices were sedate, and core prices turned negative for the first time in almost 30years, mainly due to the now-downside distortions of Owners' Equivalent Rent.

Turning to the high-frequency weekly data ....

The ICSC reported that for the week ending February 13, YoY same store sales declined -0.7%. Week over week they declined -1.6%.

Similarly, Shoppertrak reported that:

ShopperTrak’s National Retail Sales Estimate™ (NRSE) today reported that year-over-year GAFO retail sales slipped 2.4 percent for the week ending Feb. 13 while sales increased 8.8 percent versus the previous week ending Feb. 6.
The company’s data shows snowstorms across the Midwest, South and East slowed spending early last week, only to improve later as consumers dug out....

The E.I.A. reported that gas prices fell to $2.62 a gallon, the lowest in several months. Weekly gasoline usage and continues to be lower than last year, and worse, continues to decline whereas last year it was increasing. This may be a harbinger of high prices causing consumer retrenchment, or it may also just be the east coast blizzards. Oil prices closed out the week at about $80, another disheartening development.

Railfax reports that both cyclical and intermodal traffic continues to run ahead of last week in 2009, although those and also baseline traffic declined last week vs. rising last year.

The BLS reported new jobless claims of 473,000, causing some concern by among others my co-blogger Bonddad about a break in the pattern. Personally, I see no break from the longer term patter established beginning last April, although I very much want to see declines from 480,000 in the next couple of weeks.

Finally, as promised, the best has been saved for last. In a continuing surprise, and exactly as NOT promised by Trim Tabs, as of February 17, withholding taxes are running ahead of this month last year for the second week in a row: $95.8B in 2010 vs. $94.0B in 2009. There are 7 reporting days left in the month. This will be very interesting to watch....

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Regarding the Discount Rate Increase ...

Yesterday -- after the markets closed -- the Federal Reserve increased the discount rate.

There are a few points that should be mentioned regarding this development.

1.) This is the rate the Fed charges banks who borrow short-term from the Fed. All the Fed is doing is putting the discount window back on normal footing. That's it. And to that end:

While borrowing by banks from the Fed’s discount window has already fallen to more historically normal levels from its peak in October 2008, many small and medium-size businesses still find it difficult to obtain loans, a major concern of the Obama administration and Congress.

Randall S. Kroszner, an economist at the Booth School of Business at the University of Chicago and a former Fed governor, said after the announcement: “This is a technical change that makes sense as a precondition for other changes, but is not a precursor of short-term change.”

And consider these points from the WSJ's Economic Blog:

* To normalize capital markets, the Fed has to eliminate the distortions quantitative ease create and, to this end, raising the discount rate is the first of many necessary steps. The last step will be directly raising short-term markets rates, be it the Fed funds rate or the IOER [interest rate on excess reserves]. We still don’t know what will guide the Fed to do how much and when, and that is a problem. Today’s move was designed to take free arbitrage off the table rather than be any statement about the state of the economy other than that the financial system is stable enough to begin standing on its own. A stable financial system is necessary for the economy to grow but not sufficient. The minutes of the January FOMC meeting were a sober assessment of the economy giving little sense that prospects are for anything more than stable growth around 2% to 3% despite record monetary and fiscal stimulus. Given this outlook, a pace of unwind as accelerated as some FOMC members seem to want is very much unlikely. – Steve Blitz, Majestic Research

* While the increase in the discount rate came a bit earlier than we thought, it was clearly heralded by Chairman Bernanke in his testimony on February 10. … This step, in combination with the closure of most short-term liquidity programs earlier this month “is intended as a further normalization of the Fed’s lending facilities” in light of continued improvement in financial market conditions. We too would like to emphasize that the discount rate is a tool for addressing financial system stress, while the fed funds rate is a tool for addressing macroeconomic stability. … Just like easing the terms for discount window lending programs was the first response of the Fed to the crisis (in August 2007), its removal is now the first part of the exit strategy. – Harm Bandholz, UniCredit Research

2.) Ask yourself a simple question: when should a central bank raise interest rates? When there is no need to stimulate the economy. That makes this a good sign. If the Fed were worried about the pace of the recovery, they wouldn't even think about raising the discount rate. The fact they are thinking about it indicates they see the economy in a more positive light

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Jobless Claims Up 31,000

There is a bit of confusion about the meaning of the number.

From Bloomberg:

Stocks and commodities dropped in immediate reaction to a much larger-than-expected level of jobless claims, at 473,000 in the Feb. 13 week vs. expectations for 440,000. There are important special factors possibly affecting the data but their effects are unknown and the Labor Department isn't offering any explanations. There was extremely heavy weather through most of the nation in the reporting week, and results from four states had to be estimated including the key states of Texas and California with holiday backlog in the latter having skewed prior reports.

In addition, there is the WSJ:

The number of workers filing new claims for jobless benefits jumped by 31,000 to 473,000 in the week ended Feb. 13, the Labor Department said Thursday. Bad weather can make it harder to calculate jobless claims, among other things making it more difficult for state agencies that collect and process the numbers to adjust for seasonality and forcing some states to simply estimate claim levels.

But Marketwatch reported:

Bad weather around much of the eastern half of nation apparently had little net impact on new claims last week. Many state employment offices were closed but most people file by phone or online. However, it's likely that some people who lost work due to the storms filed for a claim, wrote John Ryding and Conrad DeQuadros of RDQ Economics.

I'll split the difference and say there was some effect, but it will take a few weeks to shake out. That being said, here is a chart of the data:


Notice that since roughly the end of November, claims have been stuck on a weekly basis between ~450,000 and ~475,000. This is a bothersome development. Before then we saw a nice, continually moving lower number. But now the number is stuck in a range. Some of this sticking is due to technical issues. This week's number is the second time in about 6-7 weeks there has been an issue related to collection of the data. That is responsible for some of the blip we saw. However, I'd like to see the weekly number start of move lower.

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Dragonchild on the logistics logjam

Hoisted from the comments yesterday, this is worthy of its own post. Dragonchild responded to my point about companies "hoarding" jobs:

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To get into the "lead time" scene in a little more detail, there's a "traffic jam" effect at work. You know how it takes only a single accident to bring a freeway to a grinding halt? It only takes a shortage of ONE part to stop a production line. This is why a lot of suppliers are able to get away with stretching their lead times for now. If any resource, component or service is in short supply and the nature of it prevents it from rebounding capacity quickly, then ALL suppliers are stuck in the same situation. So if supplier A and supplier B both buy widgets and the widgets are in critically short supply because they've been cleaned out, then even if A hired more workers, there's no competitive advantage. For increased operating costs, you just use up your existing inventory faster until you're in a "line stop" situation as you wait for more parts. This is why suppliers have been able to ignore purchasers' screams of outrage; they're all in the same boat.

NDD is correct that this can't go on forever. Purchasers are notoriously cheap bastards (they're PAID to be cheap bastards), but long lead times means more capital tied up in inventory. If a part takes 30 weeks to deliver, the OEM needs to buy up 30 weeks' worth of parts. That can be an awful lot of capital when we're still recovering from a liquidity trap. Also, you lose the flexibility to adapt to changing market conditions and can get soaked. Companies hate buying a pile of parts, only to sit on them for two years because sales slowed (even if they do well overall because another product line overperformed).

The "hoarding" of jobs is indeed happening and isn't something businesses are eager to proactively reverse in a time of uncertainty, but as for why there's pressure building up, what's killing the momentum on the ground level isn't a dam of collusion so much as a logjam in logistics. As fast and flexible as our economy is touted to be, the MBAs don't know squat about logistics. You can buy and sell companies so quickly today, but industry still moves like a freight train in slow motion.

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Forex Fridays

Prices are in a classic up (A), down (B) (Consolidate in a classic pennant pattern), up (C).

D.) Prices moved below the upward sloping trendline but then moved higher in response to the Fed's discount rate announcement yesterday (the price bar is actually today's future's move).

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Today's Market

I was tied up in meetings yesterday -- so here's the recap of the last week:

A.) Prices dropped in the AM on Monday, but spent the rest of the day getting back to "0".

B.) Prices gapped higher on Tuesday, and then continued to move higher throughout the day.

C.) Prices again gapped higher at the open and then moved higher.

D.) Prices did not gap higher at the open, but did bump higher during trading.

E.) Throughout the week (so far, at least) prices have used the EMAs as technical support.

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Economists Get It Wrong

The dismal "science" of economics has managed to get something wrong again.

This time it has massively underestimated exactly how much in debt the UK economy really is. Economists had expected a January (traditionally a good month for tax receipts) government surplus of about £2.8BN. The reality was in fact a deficit of £4.3BN, the first time since records began in 1993 that the UK was in debt in January.

The Treasury claim that the Government forecasts remain as stated by Darling, namely government borrowing will be £178BN (12.6% of GDP). However, City experts now predict that the debt will overtake the 12.7% recorded by Greece.

Economists are now calling for a more credible plan by the government, to show how it will address this issue.

They should not hold their breath!

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More on Industrial Production

- by New Deal democrat

Spencer at Angry Bear, discussing yesterday's +0.9% increase in industrial production, produces an excellent graph comparing the increase in production since it bottomed last June with prior "minor" or "major" recessions, and calls this rebound "moderate":


Another way to look at it, however, is to remember
Lakshman Achuthan of ECRI's point that, in the long view, recoveries from recessions since WW2 have been less and less robust. Indeed, when you tally up Spencer's division of "minor" recessions(in regular type) and "major" ones (in bold), here's what you get:
1946
1954
1958
1960
1970
1974
1980
1981
1990
2000

So I continue to think that the best way to view this recovery in production is to compare it with the last V-shaped recovery (1983) and "jobless" recoveries (1992-3 and 2002-3). Seven months after the bottom of production, here is what they look like:


This recovery in production, unlike the two last "jobless" recoveries, is definitely V-shaped, looking very much like that of 1983.

Commenter Dragonchild has made an excellent point several times about how suppliers are stretching out deliveries rather than hiring new employees. In other words, they are "hoarding" jobs. I don't see how it can go on much longer. If there are 10 vendors in a market, surely 1 or 2 are going to figure out that they can grab market share this year by hiring at least new temporary workers and promising shorter delivery times. Once that happens, the other vendors almost have to match them, and the dam breaks.

So while this recovery has been "jobless" so far, because payrolls ex-November haven't been positive, that doesn't necessarily mean there isn't going to be a delayed V.

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