A Minsky Moment?

John Plender wrote in yesterday's Financial Times,  "Complacent investors face prospect of a Minsky moment."  

One observation is hard to quarrel with, to wit,  "It is historically atypical in that the central banks have been encouraging market participants through quantitative easing to take on more risk to help stave off a perceived deflationary threat. This was, in a sense, a perpetuation of the asymmetric policy pursued by the Federal Reserve before the crisis." we have seen the Greenspan Put on the stock market, the Bernanke Put on the housing market, and are we now seeing the Powell Put on the current bubbles?

Financial assets have grown rapidly relative to the stock of physical capital and certainly some bubbles have been inflated, most notably the growth of unicorns.

On the the hand, he claims hat that "Since the Trump tax changes (sic) are unlikely to have more than a modest impact on potential output, the economy, already close to full employment, could run into capacity constraints."  This is unduly pessimistic.  The Paul Ryan/ GOP/Trump tax cuts have dramatically reduced the cost of equity and, for well capitalized companies, for corporate investment in real capital.  Reducing marginal individual tax rates improves incentives to work.  The limit on state and local tax deductions reduces the tax incentive to drive prices up in the most expensive markets in the nation.

The supply side tax changes combined with the administration's deregulation initiatives has accelerated economic growth after the slowest economic recovery in a century.  Growth, the first real wage rate rises since the 1990s, and the improved incentives have increased labor force participation by attracting workers who have given up or face disincentives to taking paying employment.  Workers on disability have reentered the workforce.  Yes the unemployment rate is the lowest in forty-nine years, but the prime age employment ratio is still below its level at the beginning of the 2007-9 recession even though it is eleven years later.

Not only did the 2017 tax act create supply side incentives for the real economy (which Mr. Plender judges too weak), but it also reduced the tax incentive to over lever.  It limited corporations' ability to deduct interest expense and the lower corporate marginal corporate tax rates reduce debt's tax subsidy.  The debt binges by Netflix and Amazon among others is their last hurray.  

Citing Dr. Doom (Henry Kaufman), Plender worries that "the 10 largest financial institutions held about 10 per cent of US financial assets. Today the figure is about 80 per cent."  While that may reduce the liquidity of financial markets, but it also makes the banking sector more stable.  Canada with similar concentration for a century or more has not had a banking crisis since the 1840s.  A shift of capital raising from the financial markets to the commercial banks by itself would increase the potential for economic growth.  A key initiative by the Republicans with some bipartisan support is to reduce the regulatory burden of smaller banks that are not a systemic threat and shifting the emphasis from regulation to capital.

News from the FT & WSJ Today

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The February Jobs Report in 11 Charts

Analysis: Strong February Jobs Report 3/10/2017 9:44AM WSJ's Paul Vigna and Nick Timiraos analyze the February employment report, representing the first full month of the Trump administration. They discuss whether the upbeat payrolls and hourly wages figures are likely to give the Federal Reserve the green light to carry out several interest rate increases this year. Photo: iStock

Employment Was Up in March

The Bureau of Labor Statistics (BLS) reported jobs on U.S. payrolls were up 214,000 in March and the unemployment rate fell to 8.8 percent. Particularly encouraging was a 17,000 increase in manufacturing jobs.

And What About the Aircraft Industry?

The BLS did not publish data for the aerospace industry, but it did report that jobs in transportation equipment were up 6,100. If we exclude motor vehicles and part, the rest of the sector (mostly aerospace) was up 2,900 jobs. That is good news for Wichita.

America's unemployment rate dropped from 9.8% to 9.4%.

The Bureau of Labor Statistics released its employment report for December. America's seasonally adjusted unemployment rate dropped from 9.8% to 9.4% in December. Is this proof that the household survey is inherently unreliable or that this is a reversal of trend?

Neither!

The unemployment rate has been following a slow downward trend since the fall of 2009. Now looking at the seasonally unadjusted data, we also see it has been falling for five straight months relative to the same month last year (SPLY in postalese.) This trend has been masked by the seasonal adjustment process (see the previous post.)

No doubt analysts will be disappointed by the small increase in jobs (103,000) reported by the establishment survey. Do not give it too much weight. These data will be revised, perhaps drastically in February, leading also to substantial revisions to the GDP series. This will cause the whole history of the recovery to be rewritten.

The good news is that the establishment data may become a more useful real time cyclical indicator. The BLS announced, "Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors. Additional information on this change is available at www.bls.gov/ces/ces_quarterly_birthdeath.pdf."

And that is very good news. Tracking the next cycle with the jobs data will be more accurate.

On a sour note, the BLS will update the household estimates with new population data in February. Historically the gnomes resident in the Postal Square Building have not been time series friendly in their population updates.

Maybe America's Employment Malaise Is Not as Bad As It Seems

Tomorrow we get to see the December employment data.  It may well show that things are not as gloomy as we have been seeing.    Certainly America's 9.8% unemployment in November was depressing and in that vein, I wrote "A quick survey of the numbers demonstrates that the national economy is mired in a malaise worse than in any previous postwar U.S. recession."

Wall Street has grasped at any number of straws in the wind to convince itself that things are looking up.  Unemployment claims are down, manufacturing purchasing mangers are saying things are up.  Can the stock market's upbeat tea reading be right?  Yes, it can.  

Whatever tomorrow's data show, the employment scene may not be as bad as it now looks.  I am mostly looking at the household survey data.  The last two recessions demonstrate that the establishment data is an unreliable real time guide to cyclical trends.   The survey is badly biased during downturns and perhaps recoveries.  It misestimates the cyclical impact of births and deaths of firms on employment.  

Why might the data paint an overly gloomy picture?  I have come to believe that the seasonal adjustment overcompensates during cyclical swings.  Consider these data:  while the seasonally adjusted unemployment rate is 9.8%, the unadjusted rate for November is 9.3%.  Not surprising.  Retailers hire going into the Christmas season. On a seasonal adjusted basis, retail employment was down from October (establishment data); yet that same survey shows retail employment was up over November, 2009.  Curious.  Moreover, the national seasonally unadjusted unemployment rate (household survey) is down from a year ago for four straight months.

The seasonal adjustment process averages data over thirty years.  It is a blunt instrument for dealing with the massive impact household deleveraging is having on retail sales, the structure of the retail sector, and thus seasonal retail employment.  Indirectly, this affects the estimate of the seasonally adjusted national unemployment rate as well.

Before you break out the champagne,  note my favorite long term cyclical indicator, the employment rate peaked in April.

While I am backtracking on what I said about the national employment picture a little, I stand by my two conclusions on our long term prognosis and Wichita's prospects:

"The fundamental dislocations that led to the recession of 2007 to 2009 have not been addressed." and

"We have three significant strengths on which [to buck the national] trend...: exports, energy and entrepreneurship."

Economic Update: Wichita and the World

1) The world economy is eighteen months into an economic recovery. The U.S. economy lagged six months behind. Employment lagged another six months behind that and Wichita lagged yet further behind.  The most recent news is mixed.  the Commerce Department reported Housing starts were up.  Alan Rappeport writes in the Financial Times that "That was stronger than economists expected and marked the third month running that starts increased."  The Fed reported that September industrial production was down.  Rapeport tells us that "US industrial production fell for the first time in more than a year last month."

2) The U.S. unemployment rate is still at 9.5% reflecting the enormous dislocations caused during the bubble years of 2004-7. The administration's two top economists Larry Summers have retreated to academia.  CNN interviewed Peter Diamond the new Nobel Laureate who seems to see it differently.  He told CNN’s Fareed Zakaria GPS: "The central focus of the problems in the economy right now is not that the labor market is working badly but the demand for labor is way down. ... I view the US economy as extraordinarily adaptive . . . I expect the economy to adapt this time as well."

3) Wichita and Kansas are seeing signs of recovery. Wichita's August unemployment rate at 8.2% is down a percentage point from a year ago. (August is the worst month each year.) For four straight months we have seen an improvement over the year before. A new state study shows job openings up and up relative to the number out of work. The Kansas Department of Labor reported, "There are more job vacancies in Kansas this year than last year, according to the 2010 Job Vacancy Survey. The survey, completed by employers during the second quarter of 2010, found there were an estimated 32,091 job vacancies statewide. This represents a 24.5 percent increase in vacancies from 2009." World trade is vital for Kansas and the world economy is pulling up the Kansas economy.

4) As for the aviation industry, it is a three legged stool: commercial, military, and general aviation. Commercial aviation is reviving. The lessors are back. The other two legs are weak.  Most countries are cutting military spending around the world. General aviation (business jets and private planes) is still in a big slump.

5) The business aviation industry has its big show in Atlanta while we speak. In connection with that, Honeywell's new forecast shows a 10% increase over the next decade, but tough slogging over the next two years. For 2010, Honeywell Aerospace estimates deliveries of 675-700 new business jets, down 16-17 percent from 849 in 2009 mainly due to continued global economic weakness as well as overarching concerns about government debt, austerity programs, export growth, financing costs, and general availability. Rob Wilson, President, Business and General Aviation, Honeywell Aerospace said "The industry should begin another period of expansion by 2012"  Molly Mullins reports on Hawker's new business jet, the 200 and on Cessna's new version of the Citation, the Citation X.

6) Hawker-Beechcraft's two lines of business are military and business jets: not a pretty picture. Kansas has put together a package to keep it from moving to Louisiana, but the union has now rejected the firm's proposed labor contract. This cloud remains over our economic horizon.

Second Quarter U.S. GDP Down I

How much America produces as measured by its Gross Domestic Product fell again in the second quarter which ended June 30th, 2009. The decline of about one percent was in line with consensus estimates. No surprise to the stock market which rallied yesterday in anticipation. You could say the increase in pain is slowing down or as economists would put it the economic decline is decelerating.

Analysis

How did we get to a -1 percent seasonally adjusted annual rate of decline in total spending from a 6.4 percent decline in the first quarter? The huge declines in investment spending turned into more modest declines in the second quarter. This improvement would have gotten us back to zero but the rest of the accounts deteriorated by about one percent.

Government spending went from a net drag on the economy to a net addition to aggregate demand. Consumption spending fell however. While bad for contributing to domestic demand, it is a step toward correcting the fundamental imbalances that enabled the Great Financial Bust.

Exports contributed less and imports contributed more the growth in spending than in the previous quarter. For four straight quarters, import reductions have offset export losses to make a net positive contribution to the demand for American products and services. You could say we have helped ourselves by exporting part of the recession.

Has the Recovery Begun?

While my initial call that the U.S. economy toughed in March looks a tad optimistic, it now seems most likely that the turning point was in second quarter.

Revisions

The scorekeepers in the Commerce department's Bureau of Economic Analysis revised the history, so do not be surprised to find out that what you thought you knew about past cycles has been thrown down the memory tube (if you do not catch the allusion to 1984, add Orwell's book to your "Must Read List.") I do see that the BEA now shows one negative growth for 2008 quarter.

Making Sense out of the Economic News: Not As Bad As The Dow Took It.

We have just had a great deal of economic news come out.

The Employment Report: The unemployment rate is up slightly to 9.5 percent (compared to 9.4 percent in May.) This was as expected. The payroll survey showed a bigger than expect drop: 467,000 jobs in June. The latter became the headline news. Wall Street opened a hundred and fifty points lower and continued to fall. London and European stock markets accelerated their early morning declines in response to the news. A closer look at the data shows a curious divergence in the trends measured by the household and establishment surveys. Over the last three months, the establishment survey shows employment falling by an average of 436 thousand jobs a month, while the household survey shows a monthly fall in employment almost half that (230 thousand.) This is significant because in the last recession household employment growth turned positive well over a year before payroll jobs turned up. Corrected for base biases, it may be a better cyclical indicator.

Aerospace appears to have lost another five thousand jobs in June for a two month total of 12-13,000. BLS does not break these data out, so I have to estimate them from the published data.

Consumer confidence was down. German and Australian retail sales were up and beat expectations. U.S. durable goods orders were up in May.

Non defense aircraft and parts orders were up as well. Although orders were half May, 2008, they reached the highest level since October. Order backlogs for the industry fell from 39.2 months to 33.4 months.

Car sales are up and appear to have bottomed out in February. They are way from May, 2008.

Turn in Thursday for News

Thursday will bring two big releases of national economic data with significant implications for the Wichita economy.

9:00 A.M. Central Daylight Savings Time: The Bureau of Economic Analysis (of the Commerce Department) will issue data for May manufacturing orders, shipments, backlogs, etc. While total new orders are an important cyclical indicator, we in Wichita will be particularly interested in the new and unfilled orders for the aerospace industry. This will not include the impact of Quantas' recent cancellation of orders for 15 Dreamliners.

7:30 A.M. Central Daylight Savings Time: The June employment report. Normally this would be issued Friday, but the Bureau of Labor Statistics is moving it up a day for the Independence Day holiday. The consensus of forecasts is that it will show a loss of 350,000 jobs on nonfarm payrolls and the unemployment rate up to 9.6 percent.

What to look for: A better showing on job losses would support our thesis that the economy has bottomed out. Even without a significant surprise from the payroll data, the report may better expectations on the unemployment rate which is based on the notoriously noisy household survey. The household survey also gives an alternative measure of employment. Analysts tend to ignore this measure for techical reasons, however I have found a careful analysis of these data gives better signals at turning points. By this metric the decline in employment has moderated even more than manefested on the establishment survey. Look for further confirmation of bottoming out. The non aerospace component of Wichita's economy needs to see a pickup in activity in the national economy.

Unemployment Jumps to 9.4%; Job Losses "Down" to 345,000

My first quick thoughts:

The May establishment survey shows 345,000 fewer jobs than in April. That is bad and makes my assertion that March was the recession trough look a little shakier. Still after the massive losses we saw over the last few months, it looks like an improvement.

The Bureau of Labor Statistics also surveys households. This survey shows an even bigger drop in the number of Americans who say they have jobs: 437,000. Remember that the household survey actually showed an employment increase (yes, I said an increase) in April and that this survey is subject to greater month to month sampling variation than the establishment survey. It also does not have the contemporaneous biases caused by the firms births/deaths adjustment process.

The headline news is the jump in the unemployment rate from 8.9 percent (compared to Wichita's 7.1 percent) in April to 9.4 percent in May. This is the worst since the early 1980s. (Unemployment hit a peak of 10.8 percent in November and December, 1982.)

How did the unemployment rate go from 8.5 percent two months ago to 9.4 percent?

The biggest driver is an increase in the work force of over a million in those two months. More people are looking for jobs.

Why? Hard times force more people into the work force. Most of the increase is among men and teenagers. This increase might reflect high school students and graduates looking for jobs sooner than the BLS's statistical adjustment assumes they do. There was a 536,000 increase in the workforce among those with no or only high schooling. The minimum wage increased last July and is slated to do so again next month. As often happens when the minimum wage goes up, the unemployment rate rises among minority teenages. It is now close to 40 percent for Black teenagers.

Wichita

It looks like employment fell another 7,000 jobs in the aircraft industry. Still now there may be more jobs in aerospace than in the automotive manufacturing.

Signs of A Recovery?

Australia's employment was up, unexpectedly, in March and the unemployment rate fell from 5.7 percent to 5.4 percent.

Rupert Murdock keeps pace of the world economy by monitoring revenues from his vast media enterprises around the world. These are heavily dependent on advertising which is cyclical like capital expenditures. At a News Corp. earnings call, he said, "I am not an economist…but it is increasingly clear that the worst is over….As you know, I have been uncharacteristically pessimistic in recent calls, though I would argue that it was a well-founded concern. But there are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier.” Peter Kafka's whole posting is worth reading.


Nina Koeppen and Jonathan House report in the Wall Street Journal, "More European indicators are beginning to show some tentative signs of the recession easing in the second quarter, with German business sentiment leading the way.

"German business confidence improved at the start of the second quarter, after hitting a record low in March, indicating that the worst of the economic slump may soon be over, a survey from the German Ifo Institute showed Friday.

"The Ifo business climate index rose to 83.7 from a revised 82.2 in March, which marked the lowest level since records began in 1991."

"

GDP Dropped at a 6.1% Annual Rate; Final Sales Down c.3.3%

The GDP numbers are out for the first quarter. The Commerce Department's Bureau of Economic Analysis announced GDP declined at a 6.1 percent seasonally annual rate. The acceleration of the decline in inventories knocked 2.8 percentage points off of that annualized growth rate. Final Sales declined at a 3.3 percent seasonally annual rate.

Declines in investment spending accounted for more than the total decline in GDP.

Prices, as measured by the GDP price deflator, rose 2.9 percent (2.0 percent without food and energy.) Inflation is not dead.

On the bright side, such a massive inventory fall should be self correcting to some degree. Import declines more than offset the small fall in exports. Net exports on net contributed back almost two percentage points to the negative growth rate in GDP.

The decline in GDP was worse than the 5.0 percent consensus expectation.

Yes, I am sticking with my prediction thet the U.S. economy hit its trough in March. The magnitude of the inventory correction is in line with my scenario.

PPI and Retail Sales Down

The Bureau of Labor Statistics reported that the Producer Price Index (PPI) for finished goods fell 1.2 percent in March (0.0 excluding energy and food): that is 3.5 percent below a year ago. PPI for intermediate goods fell 1.3 percent and for crude goods .3 percent.

The Commerce Department announced Retail and Food Sales fell 1.1 percent in nominal terms. Autos and auto parts lead the decline with a 2.3 percent decline. Note this is in nominal terms. If consumer prices also fell this would reduce the decline in real terms.

Since the number of cars sold in March rose, there must have been a substantial fall in some combination of the prices or the richness of the mix of cars to produce the decline in dollars spent on cars and parts. Retail Sales of automobiles and light trucks and automotive parts were down 2.3 percent based on an 8.5 percent increase in vehicle sales offset by a 9.7 percent fall in dollars spent per vehicle sold.

This could provide a nice bottom for the recession trough.

The Employment Report: Have We Hit Bottom?

Measured by the survey of U.S. establishments, jobs fell by approximately two thirds of a million in March (661,000) and the unemployment rate rose to 8.5 percent.

The financial services sector has lost a half million jobs since December, 2006.

And for the Wichita economy,what about the aircraft industry?

The Bureau of Labor Statistics publishes data on employment in transportation equipment other than motor vehicles which is predominantly the aircraft industry. In our sector, jobs fell by 8,400 in March with a total decline of over 75,000 since September.

And the future?

Two weeks ago I said my hunch was we were at the bottom. The employment report is grim, nevertheless, I am now convinced that we are at the recession trough. The vast worldwide inventory correction should have run its course. Many of the indicators (housing starts, factory orders, home sales) have hit bottom and have turned up, if only for a month. The stock market, the earliest of leading indicators is rallying. Unfortunately employment will lag well beyond the cyclical bottom.

Unemployent Goes to 7.6%; 2008 Payrolls Revised Down

This morning's employment report from the Bureau of Labor Statistics (BLS) shows a drop in payroll employment of almost 600,000 and the unemployment rate jumping to 7.6%.

Surprise, surprise, the BLS revised their estimates of payroll jobs in 2008 by about 350,000! The BLS's method for truing up the jobs data can not help but fail during recessions. Accuracy when the economy is in trouble does not appear to be high on its priority list. The latest revisions do not appear to have changed the timing of the recession as recorded in the data. The unemployment rate hit bottom in the spring, 2007 and payrolls peaked in November/December, 2007. When we can lay our hands on more details than are available in the press release, we can be more precise.

Closer to home, aerospace employment fell some 9,000 in January. This does not necessarily reflect the flood of layoffs announced in general aviation this past week (Cessna, Hawker-Beechcraft, and Bombardier.)

Even GDP Numbers Are Now Showing A Widening World Recession

The U.S. economic recession which began in the summer of 2007 is starting to manifest itself in published GDP growth data.

The Financial Times and the Wall Street Journal report that GDP fell .5% in the third quarter. Since inventory investment added almost one percent to GDP growth, final sales must have fallen at close to a 1.5 % annual rate. Read details in the press release on the BEA website.

Import prices rose almost sixteen percent. For a country importing close to two trillion dollars of goods and services, that is equivalent to America's losing rough $300 billion in purchasing power. Talk about negative stimulus to aggregate demand!

Norma Cohen, FT's Economics Correspondent, reports the Organization for Economic Co-operation and Development (OECD) "is now forecasting four consecutive quarters of contraction for the US, countries using the euro, and OECD nations as a whole."

Economists Are Divided On Whether We are In a Recession

Your friendly blogger, Malcolm C. Harris, has been saying for some time that the U.S. economy has been in recession since some time last year. The profession is divided as we hear from Phil Izzo interviewed by the Wall Street Journal's Kelsey Hubbart:

Kelly Evans Talks about the Prospects for the Economy

July Employment: The National Recession Is Still Bypassing Wichita

The Bureau of Labor Statistics issued its July Employment report and it gave cold comfort to those who deny we are in a national economic recession. The July unemployment rate rose to 5.7% from a June rate of 5.5%. In contrast, Wichita's unemployment rate was 4.3% in June.

Payrolls fell by 51,000 jobs. Wichita's export base is still doing well. The Labor Bureau does not break out the aircraft industry in its report, but by my analysis of their data jobs grew in the industry by about 1.3% over last year. In contrast many local companies serving other markets have experienced weak demand over the last year.

One measure of how the economy is doing is the ratio of jobs to the American population. Although it is a little noisy from month to month, it portrays the fundamental trends (see the chart.) In this recession the employment ratio has fallen by 107 basis points (1.07 percentage points.) That is mild in comparison with prior recessions: either we have a lot more pain ahead or we are in a very mild recession.

Wichita Is Faring Better Than the U.S.

Jerry Siebenmark reports the consensus that our local economy is sailing in a sheltered bay while the national economy struggles to stay afloat in a tempest.

"While high gasoline and food prices are having an effect on the area's economy, they are not dramatically slowing it, local economists said Tuesday.

"'Our local economy, for the most part, is doing very well,' said Malcolm Harris, professor of finance at Friends University. 'Aerospace is doing very well, the farm economy is doing well and natural resources -- oil and gas -- is doing very well.'"

Our local unemployment rate is 1.2 percentage points below the national average.