Charts of interest

Some charts I find of interest to the general public, and which you're unlikely to find elsewhere:

Chart #1

Chart #1 sheds light on an important input to the dollar's value: real yields. The red line shows the level of real yields on 5-yr TIPS. These are true real yields, since TIPS are bonds whose principal is adjusted by the CPI, and whose coupon is a "real" yield. (Their return to the investor is equal to the rate of consumer price inflation plus a real yield.) Real yields on TIPS are determined by market forces, and are in turn influenced by the market's expectation of future Fed policy. TIPS are not only safe from default, but also safe from the ravages of inflation. 

The blue line is an index of the dollar's value vis a vis other major currencies. That the two tend to move together suggests that higher real yields enhance the value of the dollar, while lower real yields detract from the dollar's value. The situation today suggests that the dollar is trading on the weak side of where it would normally be given the current level of real yields. This further suggests that investors aren't entirely comfortable with the outlook for the U.S. economy (e.g., tariffs, deportations).

Chart #2

Chart #2 shows my model of the Purchasing Power Parity of the dollar vs. the euro. Currently, the model suggests that the dollar is just about equal to its PPP value against the euro. That further suggests that an American traveling in Europe is likely to find that the dollar price of goods and services there is roughly equal to prices in the U.S.

Chart #3

Chart #4

Chart #3 shows the level of credit spreads on Investment Grade and High-Yield corporate bonds—higher spreads reflecting greater credit risk, and lower spreads reflecting lower credit risk. Spreads today are just about as low as they have been for the past several decades. Chart #4 shows the difference between the two, which is a simple way of judging how nervous the bond market is. Taken together, these spreads are excellent barometers of the health of corporate profits, and by extension, the health of the economy. Conditions are looking pretty good according to corporate bond investors.

Charts #5 and #6

Chart #5 shows the ratio of federal transfer payments (social security, medicaid, unemployment insurance, subsidies, food stamps, etc.) to disposable income. Transfer payments represent money the government gives people money for reasons other than to compensate for their labor. Chart #6 shows the Labor Force Participation Rate, which is the ratio of people working or looking for work divided by the number of people of working age.

The dotted vertical lines mark periods of time when transfer payments ratcheted up rather sharply. That the participation rate ratcheted down each time suggests that people are less willing to work when they receive more money for not working. Funny how that works!

Note the more-than-doubling of transfer payments as a percent of disposable income from 1970 to today. Today, one of every five dollars spent by consumers comes from the government. Viewed from another angle, taxpayers are funding 20% of consumer spending. 

Chart #7

Chart #7 shows the breath-taking growth of federal government spending and tax receipts. Revenues today are more than 5 times what they were 35 years ago, and have increased at a 4.8% annualized rate. Spending today is more than 6 times what it was 35 years ago, and has increased at a 5.3% annualized rate. Our problem is runaway spending, not a lack of taxes.

  

Chart #8

Chart #8 shows the major components of federal revenues. Individual, corporate, and payroll taxes have all increased relentlessly with the passage of time. What stands out here is estate and gift taxes, which today represent a paltry 0.6% of total revenues (~$30 billion per year), and which have not increased at all over the past 25 years. The net worth of the private sector has quadrupled over the past quarter century, but estate and gift taxes haven't budged. This tax could be abolished and the impact on federal finances would be less than a rounding error. Yet this tax gives rise to an army of tax lawyers and accountants, while at the same time diverting trillions of dollars to sheltered investments. It undoubtedly costs the economy far more than the value the government collects. We would all be better off without it.

The June jobs report was not strong

Today's June jobs report is being touted as strong enough to put any chance of a Fed ease on hold. That's silly, in my view. Putting things in the proper perspective, today's job report was one more in a year's worth of mediocre numbers. Private sector jobs (the ones that really count) have been growing at a 1% rate for over a year, which is consistent with real GDP growth of about 2%, a bit less than we've seen since 2010. Nothing in this report should give the Fed a reason to keep monetary policy tight.  

Big Picture charts: modest growth and low inflation

Here are 5 charts which illustrate some very important points about the state of the economy and the outlook for inflation. 

The economy is doing "Ok", but it's nothing to write home about. The housing sector is struggling mightily, and is very unlikely to improve without a boost from lower interest rates. Jobs growth is modest at best, and unlikely to improve without immigration reform which prioritizes making hard-working illegals legal instead of deportable. 

There is no longer any doubt that the Fed has tamed inflation.

Given low inflation and an economy that is struggling, there is no reason for the Fed to delay lowering interest rates. Trump is right to criticize Chairman Powell for this, but Trump could help by backing off on his egregious tariff demands and his aggressive deportations of illegals, most of whom are decent, hard-working, and tax-paying members of society. He should focus instead on lowering tax and regulatory burdens and greatly expanding immigration quotas.

Chart #1

Chart #1 is yet another update of a chart I've been featuring for the past 15 years. The green line represents the 3.1% annual growth path the economy followed from 1966 through 2007. During that time, the economy was able to rebound and regain that growth path after every recession (this is commonly referred to as the "plucked string" theory of growth). Since the end of the Great Recession in mid-2009, the economy has only managed to follow a 2.3% annual growth path (red line). If the economy had instead recovered to a 3.1% growth path it would be 23% bigger today. I've attributed this monstruous growth shortfall to increased tax and regulatory burdens and a sizable increase in transfer payments. (See my post from 11 years ago which explains this in greater detail.)

Chart #2

Chart #2 compares the year over year growth rate of private sector jobs (red line) with the year over year growth rate of real GDP (blue line). It stands to reason that without more people working it's hard for the economy to expand. Currently, jobs growth is only slightly higher than 1%, and the economy has expanded by only 2% in the past year. That 1% difference is a good approximation of productivity growth, which is less than the 1.9% annualized rate of productivity since 1966. If jobs growth doesn't pick up (and it won't if we are deporting millions of hard-working illegals), then the economy is going to continue to grow at a sluggish pace. 

Chart #3

Chart #3 compares the level of housing starts (blue line) to an index of homebuilders' sentiment (red line). There is only one interpretation: the outlook for the housing market is gloomy. Housing affordability is at all-time lows (due to the combination of high prices and high interest rates), and the inventory of unsold homes is relatively high and rising rapidly. I'm hearing talk that construction sites around Southern California are having trouble getting workers to show up—they are mostly Mexican and many are likely illegally here. Everyone is afraid of ICE raids. 

Chart #4

Chart #4 shows the year over year change in the Personal Consumption Deflators (total and core). Although both are somewhat above the Fed's target range, a closer looks says they are well within it. In the past three months (March, April, and May), the annualized rate of growth of both these inflation measures has plunged to 1.1% (total), and 1.7% (core). Powell's favorite measure, PCE core services less shelter, is up at a mere 1.1% annualized pace in the past 3 months. Note: these same three months include the impact of Trump's higher tariffs—which is to say that higher tariffs have not resulted in higher inflation by any measure. This is what I and many others predicted.  

Chart #5

Chart #5 shows the three components of the PCE deflator: services, durable goods, and non-durable goods. As should be obvious, goods prices have been flat to down for the past 3 years. Inflation is only to be found in the services sector, and shelter costs make up a large portion of that sector. Lower housing costs are going to be depressing services inflation for a long time. The Case/Shiller index of national home prices peaked earlier this year and has fallen at an annualized rate of 1.8% in the most recent 3 months. Add it all up and the outlook for inflation is LOW for the foreseeable future. I think the Fed is getting very close to realizing this, so we will soon have lower interest rates and that should help.

Despite this somewhat downbeat, near-term outlook, I remain reasonably confident that we can avoid a disaster and the economy can improve with time. Trump has been a wrecking ball in many ways, which is unfortunate, but in the process he has provoked a lot of thought and shaken up things that needed to be shaken up (corruption and waste in the federal government, immigration, trade barriers, to name just a few). Between the Abraham Accords and the targeted bombing of Iran's nuclear sites, he may well have transformed the future of the Middle East for the better.