Friday, December 7, 2018

Clouds and silver linings

Markets have been unusually nervous and volatile since late October, driven by fears of an escalating trade war with China, emerging weakness in European economies, tighter monetary policies from most major central banks, the post-election realities of a divided Congress, and a growing sense that the US economy is struggling and/or possibly staring a recession in the face. I've called it "global angst" in my current favorite chart (see Chart #16 below), "Stocks climb walls of worry."

Without doubt, things could be better than they are, but there are silver linings to a lot of the clouds. Business investment is relatively weak, but corporate profits are at record levels. The housing market and residential construction have softened, but this is being at least partially offset by the recent 40 bps decline in mortgage rates. Today's jobs number was disappointing, but jobs growth this year still is stronger than it was last year. The Fed says it plans to raise short-term rates in gradual fashion, but the market has priced out two of the tightenings it expected earlier this month (the market now expects only one more tightening in the next 12 months, and no more after that). The yield curve has flattened in some areas, but remains positively sloped, and real short-term interest rates are still very low (only slightly above zero). Inflation expectations have fallen below the Fed's target, but this is almost entirely due to a recent sharp drop in oil prices. None of this points to recession.

The problem is not the Fed, not deflation (or even low inflation), and not the yield curve. I think the main problem is a general angst that finds its strongest expression in the outlook for the US-China conflict. This creates uncertainty which acts as a headwind to growth and risk-taking in general.

Regardless, we are besieged by worries of all sorts these days. What follows are 16 charts which help put things in a useful perspective:

Chart #1

Chart #2

Chart #1 compares real and nominal 5-yr Treasury yields, and the difference between the two. Note how real yields (blue line) remain in a gradual uptrend: this is a direct reflection of the market's perception that the US economy remains healthy and is likely to continue growing at a 2.5-3% pace, in my estimation. Note also the recent decline in expected inflation: it's entirely due to the decline in nominal yields. And as Chart #2 shows, the decline in oil prices fully explains the drop in inflation expectations. No problems here.

Chart #3

Chart #3 shows two points on the real yield curve, which is the most important yield curve to watch (real yields are the true measure of how high or low interest rates are). The blue line is the overnight real rate, and the red line is effectively the market's forecast for what the blue line is going to average over the next 5 years. The time to worry is when the blue line exceeds the red line. There's still a healthy spread between the two.

Chart #4

Corporate credit spreads have widened a bit as oil prices have plunged. But as Chart #4 shows, credit spreads are still relatively tight, and the most important measure of spreads (swap spreads, because they tend to lead other spreads) remains very low. Swap spreads are also a good measure of financial market liquidity, and at today's levels they continue to suggest that liquidity is abundant. That's very important, since liquid markets allow for market participants to exchange risk freely. Note how the sharp rise in swap spreads priced the Great Recession; they got so high that the market was almost paralyzed, and that contributed significantly to the meltdown of mortgage-backed and other risky securities. Liquid markets can deal with all sorts of problems, just as free markets maximize economic efficiency.

Chart #5

Chart #5 shows the very impressive reduction in private sector leverage that has occurred since the end of the Great Recession. The average household today has very strong financial fundamentals, and that is effectively a buffer against negative shocks.

Chart #6

Nominal and real net worth of the private sector reached an all-time high as of the end of September: $109 trillion. As the above chart shows, recent increases in household net worth are very much in line with the long-term, inflation-adjusted historical trend. This was not the case with the asset price "bubble" that occurred prior to the Great Recession, and prior to the 2001 recession—markets and households got overextended. Note also the 10-fold increase in real net worth in the past 66 years! This is nothing short of breathtaking progress.

Chart #7

Chart #8

Chart #7 shows that the increase in private sector (household) net worth since 2008 has been driven mainly by rising stock prices and increased savings (i.e., financial assets). Real estate values and debt levels have increased only modestly. In turn, as Chart #8 shows, rising stock prices have been supported by rising corporate profits. It's not at all obvious that we are living in a bubble that threatens to pop.

Chart #9

The ISM manufacturing and service sector indices provide very timely insights into current economic activity. Both have been very strong of late. Chart #9 compares the ISM manufacturing index and quarterly GDP growth. The current strength in the manufacturing sector points to very strong economic growth overall, at least 4% for the current quarter. That contrasts significantly from the modest 2.4% Q3/18 growth rate projected by the NY and Atlanta Feds' forecast models.

Chart #10

As Chart #10 shows, hiring intentions in the all-important service sector (70% of the economy) are strong. This bodes well for future jobs growth.

Chart #11

Chart #11 suggests that the US manufacturing sector is outpacing Europe's handily; it also shows how much the Eurozone economy has suffered of late. That's not necessarily bad for the US, but it is another headwind to worry about.

Chart #12

As Chart #12 shows, the US service sector these days appears to be stronger than it has been for a long time. As with Chart #11, it also highlights the weakness in the Eurozone economy.

Chart #13

Today's release of the November jobs numbers was weaker than expected (+155K vs. 198K), but as Chart #13 shows, this series is notoriously volatile on a month-to-month basis. One month's data is hardly significant. I prefer to look at the 6- and 12-month averages. Private sector jobs growth averaged 180K per month in 2017, and so far this year it has averaged 200K: that's an 11% improvement!

Chart #14 

Chart #14 shows the 6- and 12-month rates of growth for the monthly private sector jobs numbers. Here we see the modest uptick in growth rates this year relative to last year. By these measures, private sector jobs currently are growing at a 1.8-1.9% rate, and that's only marginally less than the 2.0% average annual growth rate for the past 8 years.

Chart #15

Chart #15 shows the year over year growth rate of the labor force (the total of those working plus those looking for work). Today's 1.4% annual growth rate is substantially higher than 0.5% average growth rate we've seen since the economy bottomed in mid-2009.

Chart #16

Stock prices today are down a tad over 10% from their all-time highs of last September, as shown in Chart #16. That's mostly due to an increase in the market's worries (as measured by the ratio of the Vix index to the 10-yr Treasury yield), but it also reflects the fact that the economy has failed to accelerate as supply-siders (like me) had expected. Growth has picked up modestly in the past two years, but not as much as we would have liked to see considering how much deregulation and tax-cutting there has been in the interim.

China is the wild card these days, but it's also the case that for the next two years we're going to have a divided Congress that is unlikely to pursue a pro-growth agenda, and there are few signs, if any, that global growth is picking up.

The market has priced in a lot of slowdown expectations. According to Bloomberg, the current PE ratio of the S&P 500 is 18, and that's as low as we have seen since February '16. Today's equity premium (the difference between the earnings yield on stocks and the yield on 10-yr Treasuries) is 2.7%, and that's as high as we've seen since November '14. This rather substantial repricing of equities is a potential positive, since it makes taking risk more attractive, and that in turn helps offset the de-risking forces of uncertainty emanating from places like China and Congress. Clouds and silver linings.

The question confronting investors today is not whether the economy is going to slow down (that's priced in already); the question is whether it is going to slow down by a lot, and how certain one is of that future. In this regard I remain optimistic that things won't be as bad as the market already fears. That's been my position for the past 10 years, actually: always thinking that the market was too pessimistic in its assumptions about the future. 


marcusbalbus said...

pangloss: on what theoretical or factual basis do you conclude that the market is always too pessimistic? from whose perspective? why would this condition exist for 10 years?

Alain said...

OK don't bring panglossian back.

And also, rude question the way it's presented.

This is a free blog.

Stop being an anti pangloss.


Fred Flinstone said...

Sure feels like 2011 to me when the market was very volitle only to finish flat for the year.

terex said...

Just for perspective; corp sector has seldom been more leveraged and corp solvency has never - never! - been worse off. -> Goodwill is a very volatile asset and 100% correlated w the market/b cycle and market trades >10 times goodwill adjusted equity (ATH with BIG margin).

Still missing the only graph that really matters...

steve said...

I think the problem with the markets is they have figured out that DT is an unrepentant protectionist who PREFERS tariffs. This problem won't go away and that is very concerning. I have disdained DT for over 35 years. I believe he is not well read, surrounds himself with sycophants and is vainglorious to such an extreme as to be dangerous. DT is a liberal (pro-government) wrapped around some self created image of the American flag that is ANTI free markets and therefore anti consumer.

steve said...

Saw this in NOT a reader of the post! It does however raise a good point; trade deficit is NOT shrinking and you can bet DT thinks we need MORE tariffs, not fewer. Bother.

WealthMony said...

I think U.S. equity markets have been troubled by two major factors: 1) the Fed and 2) trade & tariffs. Once we go beyond those two, we approach minor factors. Those two are major. Those two move markets. With regard to trade, something has needed to be done about China for a long time. Both political isles acknowledge this. DT has self-identified as "the Tariff Man" but he has also called for zero tariffs. There have been grumblings for decades about the US footing most of the bill for the UN, NATO and the defense of the Middle East, grumblings about unfair trade practices carried on by China which is treated as a developing nation, although it is the 2nd largest economy in the world. No one has had the gumption to take on the task of correcting these maladies. DT has. I applaud him for that. Do I want a quick resolution? You bet I do. Am I uncomfortable with his behavior? Yes, I am. Is he well read? I don't know what he reads or does not read. He does not come across as an intellectual, but intellectuals are not always right. Everyone begins with presuppositions and these determine the end of their thinking patterns. Trump is a street fighter, obviously not polished politically and has thin skin. As to his ego, it is high. But that is true about most politicians and prominent public figures. Not all show it. Shiller and Buffet are examples of that. Anyway, I do not think it helps in our analysis either to criticize or praise DT. Instead, let's look at the data and consider potentialities coming out of probabilities. Right now the Fed is in a tight spot, and we don't know if there is a resolution forthcoming in the China trade issue. That is what has equity markets worried. And Wall Street climbs a Wall of Worry. It may start climbing soon. Let's hope so. I see evidence that it will, and I'll feel much better if it does!

Fred Flinstone said...

I also think markets are concerned that Mueller's report may lay out a compelling case for impeachment. If it can show that Trump conspired with the Russians (something I never even considered as a remote possibility until yesterday), then I think even Senate Republicans will abandon him. Regardless, it's going to be messy next year it wouldn't surprise me if we had a bear market like we did from '73-'74.

Benjamin Cole said...

Another absolutely wonderful wrapup of the economic scene by Scott Grannis. You can disagree with Scott Grannis and that's fine; he would probably welcome intelligent conversation. But you have to appreciate this superb synopsis of the global scene.

My own take is that the trade situation is far overblown. Does anyone remember Richard Nixon's 10% across-the-board tariffs? How about Ronald Reagan putting an numerical quota on Japanese auto imports?

Trump is somewhat of a piker next to some of his predecessors. The shrieks you hear about free-trade probably emanate from those who have a stake in imports.

The good news is the Fed appears to be reconsidering its headlong rush towards higher interest rates.

I am concerned about squishy real estate prices. These recessions always seem to start in real estate.

The worry is that the Fed should actually be cutting rates, but will be reluctant to do so for fear of losing face.

terex said...

C mon, it is because of "DT" US markets have outperformed any other market of relevance 17-18

steve said...

Fred may be on to something. I had never until the past few days put any credence to this "Russia collusion" nonsense but the markets are telling us there may be something to it.
I THOUGHT that DT wasn't dumb enough to engage with Russia to help himself get elected-and won't believe it until there's irrefutable proof but the truth is you just don't know with DT.
Freakin report had better come out soon though or we'll peel another 10% off this market like nothing.

Matthew Grech said...

There seems to be way too much acceptance of the basic notion that the Fed is right to be raising rates. This has been true for many months now. Be it Fed Funds futures, or dot plots, or the blatherings of certain Fed poohbahs, it's amazing that more investors aren't willing to be publicly skeptical of the path the Fed is on...

So many market-based indictors point to the idea that, at a minimum, the Fed should stand pat and indicate that it sees no reason, with the data in hand, to have any rate increases in the next year or so. And as Benjamin alludes to, the Fed should be far more open to the idea of cutting the Fed Funds.

But just look at one beautiful market indicator - the breakevens on fives and tens. These are deeply liquid, market-based indicators and they incorporate everything known regarding the MARKET's expectations for future inflation. These charts are telling a super-clear story right now. And that story is NOT that the Fed is right to be raising rates at this juncture.

To argue with these charts, and to advocate more rate hikes, seems completely wrong-headed or worse. Seriously, shouldn't the Fed have to come out and explain just how its undying faith in its stupid models somehow trumps what the market is screaming? Why is it such a bold call to point to the obvious? If the market is clearly indicating an expected world of sub-2% inflation, why does the Fed's outlook for more rate hikes hold any water?

Happily, rate hike expectations have come down but I still don't understand this financial world in which a Mester-type can point to several more rate hikes and the audience just kind of collectively nods as if what she's saying isn't pure stupidity.

This is serious stuff and I'm increasingly worried that the Fed just isn't up to the task at hand. Sure it could be worse but...

The Cliff Claven of Finance said...

The charts presented here
include too much soft economic data
(diffusion indices) and indirect data
(household net worth, yields, etc.)
that do not show what is happening
to the economy as well as hard data.

I offer a view of more hard data
that show what our economy
has been doing in September and October
(weaker than usual), although two months
don't define a long term trend,
one should be aware of what's
actually happening:

I disagree that stocks climb a wall of worry.

Stocks climb a wall of confidence,
and confidence peaks near bull market peaks.

Investors were confident until mid-November.

Since then market swings have been unusually
volatile, for no logical reason -- I have seen similar
volatile behavior in the weeks and months
before prior bull markets ended

I feel sorry for Donald Trump
with Dumb-ocrats holding the House
in January 2019
-- they will investigate everything,
and be nastier than the prior two years,
and that was really nasty. I have no idea
how an executive can operate with so much
incoming flak, or why he'd want to.

marcusbalbus said...

alain: read cliff clavin, carefully. pangloss needs to set his ego aside.

Unknown said...

Thanks for the interesting perspective.

1-Net worth charts assume that present levels represent fair value levels.
Helpful inputs to assess the validity of this assumption:
-real household net worth and real GDP 1952 vs 2018
household net worth x 10
GDP per capita x 3.4
-nominal household net worth and nominal GDP 2008-9 vs end 2018
household net worth x 1.83
GDP x 1.40

What is fascinating is that interest rate levels were comparable in 1952, 2008-9 and end 2018.

2-US households' balance sheet shows a growth in market values of financial assets ++ but, in addition to point 1- made above, about 90% of the "savings" have been made by the top 10% with an associated growing inequality and the possibility of bias when interpreting average results. Note: In 2008-9, when similar dynamics played out, the bail-outs introduced were meant to share the pain but, this time, the "adjustments" required may happen in the context of a much higher populist and misery index.

3-Chart 8 assumes present levels of corporate profitability (which seem to deviate ++ from long-term historical trends) will persist for the foreseeable future, which is a big assumption.

Johnny Bee Dawg said...

Still not a shred of evidence of any Russia collusion. Nothing. Nada. Zilch. Zero.

Paying hush money to a whore is not illegal, and neither is making campaign contributions to your own campaign.
Lets not forget that Barack got over $2 million in discovered ILLEGAL campaign contributions, but Holder's DOJ decided not to prosecute.
That doesnt count the larger millions in undetermined contributions from fake names like Mickey Mouse, etc.
Nobody called for impeachment of those high crimes.

DEMS will overreach again (IMPEACH 45!!!), and Trump will be re-elected by The People.
Clutch those pearls while those filthy deplorables vote for reform, illegal immigration reform, and shrinking of thousands of pages of regulations. MAGA
Power returned to the People, and away from the unelected Government bureaucrats. (EU is tone deaf)

Trump is a good negotiator and does not like to lose. Knows when he has to deal, and when to press. It's early.
He is still using tariffs as a credible threat. His statements back that. Tariffs aren't the end goal. He has stated that he would like NO tariffs once China makes much needed reforms. China had 20,000 tariffs on US goods when he took office.

Id rather have him and Lighthizer running this deal than anybody I can think of in all of government. Everybody else has failed. And I love Kudlow in his ear.

VIX/10 year still hasn't spiked, yet, and looks like it is heading that way....but that will be a terrific buying point when it does.
Average stock down 20% already, while indexes down only 10%. At some point the two may get in line, one way or another.
Scott's Big Picture economy charts are most helpful. Some sectors appear to be more washed out than others. Im down a tenth of a percent today while Dow was down 500.
We will just have to see.

Fred Flinstone said...

JBD: some pretty smart former federal prosecutors, including those who have defended Trump on the Russian collusion issue, think Trump is in jeopardy on the payoff case. I don't think he can be indicted while still in office but perhaps impeached. I hope this does not happen but I don't think you can dismiss it out of hand.

Johnny Bee Dawg said...

It’s not a crime to pay hush money to whores that you hooked up with a decade earlier. And you can donate as much as you want to your own campaign. That’s the “payoff” case, you’re worried about. Nothing about that is illegal, and none of it has a thing to do with Russian collusion. There’s still not a shred of evidence of Russian collusion. None. Zero.

If DEMs think paying whores is an impeachable offense, they will overreach like last time and Trump will gain even more power with voters.
Not many people are left out there who lap up the MSM pablum.
Months of ranting by Maxine Waters is its own antidote with voters.
Let’s see how the geniuses Swalwell and Schiff want to play it.

Trump didn’t rape multiple women, lie under oath, mishandle classified info, sell uranium to Russia, keep classified material on a secret unsecured server to avoid government oversight and have it hacked by every foreign enemy on earth. Trump didn’t secretly sell Stinger missiles to Muslim extremists in Benghazi, circumventing Congressional oversight. Trump didn’t get our ambassador killed, and order brave rescuers to stand down, and lie about it on a whirlwind tour of complicit establishment news shows.

Trump didn’t lie repeatedly under oath to Congress, while weappnizing our intelligence community against his political opponents.

Trump’s crime was outworking that lazy sow, and beating the election rig. They can’t stand it, and they have to press hard and fast to cover their own REAL crimes. They thought she would win, and they’d be rewarded. We are witnessing an unlawful criminal cabal who are desperate to squash voters and reformers who see clearly, and know exactly what they’ve been doing.
DEMs aren’t the smartest crooks, and they’re going to overreach and shoot their little Socialist selves in the foot.

Let’s see how it goes. Markets are worried the criminals will win. We will just have to see.

Frozen in the North said...


1. On paying strippers and hookers in an election campaign --- Yeah its illegal buddy!

2. On the Russia thing, pay attention its called treason

Finally, the GOP will drop Trump like a hot potato when they realize that he harming their re-election prospects.

Cali Coast said...

Interesting the FED added a 2 month treasury on Oct 16th 2018 to the data series I use to update my yield curve watch chart.

Johnny Bee Dawg said...

Frozen....Nope. Paying strippers and hookers with your own money is not illegal...during a campaign or not. Never has been.

"Russia thing" mean Hillary taking tens of millions of bribes to sell US uranium to Russia? Yep..sounds treasonous.
As for Russia collusion with Trump campaign...there isn't a shred of evidence. If you have any, please contact Mueller, because he hasn't found any in 2 years of digging. None.

Don't know where you've been for the past 2 years, but the GOP leadership dropped Trump before he was ever elected.
Mitch McConnel famously said that if Trump were the nominee, "We will drop him like a hot rock".
They've acted accordingly the entire time. Goodbye, Paul Ryan.
The Swamp doesn't want to be drained. That is no surprise.

Markets will reward China reforms and a trade deal. Markets love the MAGA agenda, which includes stopping Chinese theft and reducing tariffs. Dont mistake Trump's short term negotiation threats, with long term policy objectives. We will just have to see how things progress.

The Cliff Claven of Finance said...

Johnny B. Dog:
That was a classic rant
that needs repeating:

"Trump didn’t rape multiple women, lie under oath, mishandle classified info, sell uranium to Russia, keep classified material on a secret unsecured server to avoid government oversight and have it hacked by every foreign enemy on earth.

Trump didn’t secretly sell Stinger missiles to Muslim extremists in Benghazi, circumventing Congressional oversight.

Trump didn’t get our ambassador killed, and order brave rescuers to stand down, and lie about it on a whirlwind tour of complicit establishment news shows.

Trump didn’t lie repeatedly under oath to Congress, while weaponizing our intelligence community against his political opponents."
my comment:
I have spent hours fact-checking all your charges
against the Clintons, and have found one serious HUGE error:
- You spelled "weaponizing" wrong (I corrected it).

However, when asked recently,
Trump rated himself an A+ as president,
and that is exaggerating,
so he must be impeached
for excessive exaggeration !

The decline of the Dumb-o-crat party
since the 2010 election
may be unprecedented in US history.

Regaining control of the House is a small victory,
but compare that with what happened to
Bill Clintoon and Barak O'Bummer after their
first two years -- Congressional losses much worse --
and they both got re-elected two years later.

For those commenting about the bimbo payoffs --
not only are they legal
if paid with the candidates own money,
but Congress has a sexual harassment claim
payoff fund that a lot of Congressmen have used,
and they don't even pay taxes on the "free" payoffs.
From another point of view:
-- Trump gave his alleged consensual bimbos money.

-- The Clintons smeared and harassed Bill's alleged
and proven consensual, and non-consensual, extramarital women.

So who treated women better (women other than their wive's, I mean) ?

Is this an economics blog ?

Matthew Grech said...

Richard Fisher is the latest advocate of the we-must-burn-the-village-to-save-the-village Fed policy. For added measure, he took a little pot shot at Neel Kashkari, one of the few to call out the inanity of such a policy.

I know Fisher's got degrees from Harvard and Stanford. But, really, how does an educated man ask (condescendingly), after living through years of quantitative easing, what could we possibly do when we need to drop rates?

It's astounding that more aren't calling out such opinions for what they are: stupid.

We can, and should, have our opinions. But advocating raising rates for the purpose of being able to drop them more in the event of economic weakness is just plain stupid.

Cali Coast said...
This comment has been removed by the author.
Cali Coast said...

@Matthew Grech

Agreed. It's obvious logic that you cannot freely raise rates - just because - so that you will be able to lower them when needed.

I've watched Powell speech where he addresses this very concern and he is not in agreement (at least not then and not publicly) that raising rates "to be able to drop them" is sound policy.

He explicitly stated that he is trying to raise in tandem with obligatory positive economic data, so it is NOT necessary to reduce rates until OTHER data prompts such measure. I see a FED that is trying to follow long rates as closely as possible so as to be just a stones throw from inverting once inflation data warrants it.

Matthew Grech said...


Yes, thankfully I don't think Powell is part of the crew that believes this. But I know there's sympathy for this line of thinking among the governors.

To be clear, there may well be reasons to raise rates. It's just that the reason stated in my previous post shouldn't be among them. That particular reasoning, I think, is stupid. Just stupid.

On the wider point of whether they should raise rates for ANY reason, I think the press should be asking each of the governors: Ok, why do you think the breakevens are plummeting (and below YOUR stated 2% goal)? The answer to this question is critical. But what is beyond doubt is that breakevens are, in fact, below the 2% goal, and sinking. This fact should resonate among the (Keynesian) governors more than it apparently does.

Scott Grannis said...

The market currently assigns a 70% probability to the Fed raising rates by 0.25% at next week's FOMC meeting. What will influence the Fed in their decision-making? Breakeven inflation is below the Fed's target, and declining on the margin. Oil prices have a lot to do with that, however (breakeven rates relate to the total CPI), so it's important to focus on core inflation. The Core PCE deflator is up 1.8% yoy, and also is declining on the margin. (The Fed's 2% target is measured by the Core PCE deflator.) By itself, this would argue against another hike. Not surprisingly, the bond market is betting that if the FOMC hikes rates next month, that will be the end of the tightening cycle.

General context of market conditions also argues against a hike: interest rates are down across the board, the stock market is weak, ex-energy commodity prices are flat, and uncertainty and fear are relatively high. Given the tenuous nature of global markets in general, and evidence that inflation is not a problem at this point, if I were an FOMC member I would vote for no change next week.

Fred Flinstone said...


If the Fed fails to raise interest rates would not the market interpret that as a lack of confidence in the economy which could lead to further market correction?

Al said...

Good reply Marcus. I totally forgot about cliff the anti pangloss .

Good one!

Missed the cliffsters doomsday replies.

Scott Grannis said...

Re: "If the Fed fails to raise interest rates would not the market interpret that as a lack of confidence in the economy which could lead to further market correction?"

It would depend on the Fed's rationale for not raising rates. It's my sense that there is a lot of concern out there that the Fed is predisposed to be too hawkish.

If they cited the unusually high level of uncertainty, I think that would be reassuring to the market. If they also cited the fact that inflation remains at or somewhat below their target, while inflation expectations have declined (because of lower oil prices), that too would be reassuring.

But if they cite concerns that the economy is weakening, that could feed back into more market worries.

The interaction of the Fed and the market is a complicated dance, where one leads the other and vice versa. The bond market has been telling the Fed to back off on its plans for higher rates, and I think the Fed has been getting this message. At the same time the Fed has been trying to reassure the market that it has confidence in the economy and the outlook for inflation, but that at the same time it is not willing to do anything rash.

Adam said...

Hello Scott,

Worth reading this analysis.
The Life Cycle of US Economic ExpansionsEdward E. Leamer

NBER Working Paper No. 8192

Adam said...

Re above:
One of the best predictors of a recession is durable goods consumption. So, is following data series, as it leads employment series: Average Weekly Hours of Production and Nonsupervisory Employees: Durable Goods (CES3100000007). Now, no signs of weakening.

The Cliff Claven of Finance said...

I would suggest that if durable good consumption
is a good indicator, then Durable Goods Orders
should be a leading indicator of durable goods consumption
There ARE signs of weakening in durable goods orders,
through October 2018 data.
Of course two months of data are not a long-term trend:

Durable Goods Orders
- October 2018 down -4.4%
- September 2018 down -0.1%
- August 2018 up +4.7%
- July 2018 down -1.2%
- June 2018 up +0.9%
- May 2018 down -0.3%
- April 2018 down -1.0%
- March 2018 up +2.7%
- February 2018 up +4.5%
- January 2018 down -4.2%
- December 2017 up +3.2%
- November 2017 up +2.2%
Durable Goods excluding
volatile transportation orders:
Up only +0.1% in October 2018
Down +0.6% in September 2018
Up +0.3% in August 2018
Up +0.2% in July 2018
Up only +0.1% in June 2018
Up +0.3% in May 2018
Up +1.9% in April 2018
Up +0.5% in March 2018
Up +1.3% in February 2018
Down -0.3% in January 2018
Up +0.8% in December 2017
Up +0.4% in November 2017

I keep track of several economic indicators here:


Scott Grannis said...

Re durable goods: I like to follow orders for durable goods ex-transportation, as well as capital goods (durable goods ex-aircraft and ex-defense). Both have been flattish in recent months, but both are up 15% or so since the November '16 elections. Both are back to their pre-Great Recession peaks, but have not really broken new high ground for the past decade. I take this as encouraging (reduced tax and regulatory burdens have boosted business investment), but not yet spectacular. There is a good case to be made that these series are leading indicators of future productivity gains, and on that score they are definitely positive. But still far from barn-burner territory.

Charlie said...

These questions are meant to be in earnest. I'm open to learning but won't try to disguise my personal biases:

Have the tax cuts paid for themselves?
If not, will they do so and when?
If they don't, and corporate taxes are returned to previous levels (or equivalent value of loopholes are closed), should we expect to see a more-or-less reverse reflection of the one-time boost in corporate (stock) value that we saw from 11/2016 through 2017?

marcusbalbus said...


Rob said...

Scott, could you comment please on this very alarming and pessimistic article in MarketWatch:


Johnny Bee Dawg said...

Still no spike in the VIX/10 yr ratio.
Still looking for the panic selling that has coincided with other major bottoms.

Scott Grannis said...

The panic level is rising: Vix/10yr ratio now over 9, Vix is approaching 26. Not yet at true panic levels, but we're getting there. I still don't see signs of an impending recession. We may just need to see real blood in the streets before this market is able to refocus on the fundamentals. A Fed decision tomorrow to pause would be helpful and warranted.