Friday, February 7, 2020

Good economic news overshadowed by Kung Flu and Sanders risks

January private sector jobs growth solidly beat expectations (206K vs 155K), but benchmark revisions going back many years reduced the number of people currently working in the private sector by 440K. Jobs growth in earlier periods was revised downwards, but growth in the past six months was increased. A mixed bag, to be sure, but in the end neither worrisome nor cause for celebration. At worst, the economy appears to be on a slightly slower growth track now than it was in the first two years of Trump's administration. At best, the economy appears to have picked up a bit in the past six months, and this reinforces news from the service and manufacturing sectors that the worst of the negative impact of Trump's tariff wars has passed—capped, of course, by the recent signing of Phase 1 of the U.S.-China trade agreement.

In any event, the signs of improvement in recent data is for the time being eclipsed by the global spread of the Coronavirus (which one wag suggested should be called the Kung Flu). The U.S. actually faces two significant risks, neither of which seems likely, but either of which would have devastating consequences: a viral pandemic and a Bernie Sanders presidency (socialism always results in tears). In prediction markets, Sanders leads the Democratic pack by a wide margin, but Trump leads overall with (currently) a 55% chance of being re-elected. Needless to say, both risks bear watching, but it's premature to run for the exits at this time.

Chart #1 

Chart #1 shows the monthly change in private sector payrolls—the private sector being the only sector that truly counts. The green dashed line is meant to highlight the fact that jobs growth in the past few years has been slower than it was in earlier years. However, there does appear to be a pickup in the past six months or so.

Chart #2

One of the most salutary—yet widely overlooked—trends in the current business cycle expansion has been the absence of growth in public sector jobs (see Chart #2). There were 22.7 million public sector jobs at the recession-era peak in April '09 (not counting the temporary boost from the census), and there are just as many public sector jobs today. Never before in recorded history have we seen such a dramatic relative shrinkage in the number of public sectors jobs. The ratio of private to public sector jobs hasn't been this high since 1957! This dramatic relative shrinkage of the public sector is akin to turning an economic headwind into a tailwind, because private sector jobs are inherently more productive, on average, than public sector jobs.

Chart #3

Chart #3 shows the 12- and 6-month rates of growth of private sector jobs. Here again we see the decline in jobs growth in recent years, and the noticeable pickup in the past six months.

Chart #4

A pickup in the labor force participation rate, shown in Chart #4, is another piece of good news to be found in today's January jobs report. This confirms that workers who were sidelined (of working age but unwilling to work or look for a job) are now being enticed to get back in the game. The economy has plenty of room to expand if this recent trend continues, and I see no reason it won't. Unless, of course, a viral pandemic emerges and/or a socialist takes control of the U.S. government.

Chart #5

Chart #5 compares the ISM manufacturing index to the quarterly annualized growth rate of the U.S. economy. The two have become less correlated in the past decade than in previous decades, but it is definitely encouraging to see the recent surge in the ISM index. At the very least this rules out the prospect of a significant near-term weakening in the economy. At best, it confirms that we've seen the worst of Trump's trade war, which has almost certainly been a significant headwind for the past year. The price we've paid to force a change in China's behavior has been steep, but it may yet prove a worthwhile gamble on Trump's part.

Chart #6

Chart #6 focuses on the export orders component of the ISM manufacturing index. Here we see solid evidence that the negative impact of Trump's tariffs and China's retaliations—which began in early 2018—has not only faded but substantially reversed.

Chart #7

Chart #7 shows the ISM service sector business activity index, which also provides evidence that things have improved significantly of late.

Chart #8 

Unfortunately, despite all the signs of improvement in Charts #1-7, the economy's animal spirits, which were perking up in the latter half of 2019, have since reversed. This can be seen in Chart #8, which shows a remarkable correlation between 10-yr Treasury yields (red line) and the ratio of copper to gold prices (blue line). The 10-yr Treasury yield tends to rise as confidence in the economy improves, and it tends to fall as growth expectations fade and risk-aversion rises. Similarly, copper tends to rise relative to gold as growth expectations improve, and copper tends to fall relative to growth as growth expectations fade (less growth means less demand for copper) and risk aversion rises (which increases the demand for the safety of gold).

The current low level of yields and the low level of the copper/gold ratio are two important signs that the market is quite cautious about the future (i.e., few have ignored the threats of a global pandemic and the new enthusiasm for socialist polices). Needless to say, all eyes should be glued to the prices of copper, gold, and Treasuries.

In the meantime, there is still much encouragement to be found in the fact that 1) swap spreads are very low, which means liquidity is still abundant and systemic risk is low, 2) credit spreads are quite low, which means the outlook for corporate profits is healthy, 3) real yields are very low, which means the Fed is not a threat to growth, 4) inflation is relatively low and stable, which means the Fed has no need to tighten policy, 5) the dollar is relatively strong and stable, which means the Fed has not been "printing money," and 6) the market still displays lots of signs of caution (e.g., gold is up, money demand is strong, and interest rates are extremely low).


Benjamin Cole said...

Yet another top-notch insight into the economy by Scott Grannis.

The Democratic party may pull off another miracle: finding a candidate that can actually lose to President Trump.

I do have a word of advice for America's establishment: Americans will likely be voting for a socialist and a populist in 2020, that is Trump versus Sanders.

You got to find a way to cut America's employee class in on the deal. I suggest lower taxes on wages and controls on illegal immigration. Somehow property zoning needs to be eliminated, and that is a tough nut to crack.

When a 78-year-old socialist, who recently had a heart attack, has a shot at the presidency, you know there's a signal being sent. Is Sanders headed for ICU or the White House? Time will tell.

steve said...

"The Democratic party may pull off another miracle: finding a candidate that can actually lose to President Trump"

Great line, Benjamin!

Piece in the NYT today (yes, believe it or not) re the record unemployment of African Americans. Even the Times has to concede this point!

Barring some really bad economic numbers-which is becoming increasingly unlikely, DT wins in a slide in Nov especially now that he has terminated his idiotic trade war-which accomplished absolutely nothing BTW.

But yeah, anything can happen and if by some crazy turn of events Sanders gets the keys, look out below...

steve said...

One follow up; the Dem candidates SUCK which gives Bloomberg an opening. Could get VERY interesting!

John said...

With the economy so strong, how can so many go for Bernie? Maybe we're missing something here.

Fred said...

Young people with a BA in English working at Starbuck's think Bernie will help make their life better. Let's hope they forget to vote.

John said...

In the international bestseller "The 7 Habits of Highly Effective People" by Steven Covey, you'll find Appendix A at the end. It is called Possible Perceptions Flowing out of Various Centers." It is about the different values (centers) that motivate people. CBP is my go-to blog for understanding the Money Centered mindset. Thanks to Mr. Grannis and all of those making helpful comments.

randy said...

Regarding NYT, you can very often see the editorial and columnist stories sloshing around in cohesive themes. For sure partly because of editorial direction, and also partly because they are herd animals. The stages of alarmism and horror over "russia collusion" and impeachment, and the cheer leading for "diversity" as the only criteria that matters, have recently been replaced by an oh shit realization that with their help, the Democrats have incredibly set themselves up to lose to the most hated man in decades. Yeah, they deserve it. Maybe a contested election and Bloomberg emerges. If that happens though, barricade the streets for the Bernie bros and Warrenistas. Just crazy times.

steve said...

"If that happens though, barricade the streets for the Bernie bros and Warrenistas. Just crazy times."

But entertaining as Hell!

randy said...

"But entertaining as Hell!"

It really is!

Johnny Bee Dawg said...

Record high, after record high, after record high.
Stocks are cheap with a 10 year yield so low.
S&P Low Volatility index/ETF is beating the market again this year, up another 5%.
S&P High Beta is up 1.2%

Markets are hoping for a Bernie nomination so that Trump wins.

God Bless Trump!

"Health-CAYAH is a human right not a privilege!!!!!"
Bernie scowls almost as much as Hillary, and is almost as disheveled.

Did I say, "God Bless Trump", yet?
If not, let me say, GOD BLESS TRUMP!
These are the best days in decades.

DownSouth said...
This comment has been removed by the author.
DownSouth said...


Could you comment on this article about consumer debt? I see that student loans are the fastest growing component. What do you think the implications of student loan forgiveness would be? Thanks!

Scott Grannis said...

Re consumer debt: This is a very mixed bag. Overall, the private sector has a relatively low level of debt, and debt service costs (monthly payments relative to income) is at historically low levels. But student loan debt is another thing entirely. This is a bubble just waiting to pop. Why? Because ever since 2009 the federal government has had nearly complete control over the issuance of student debt. As a rule of thumb, putting the government in complete charge of anything is a sure-fire way to wreak havoc on somebody or everyone for that matter.

Student loan debt is out of control, and it’s a bubble waiting to pop. Those who will be charged with cleaning up the mess are likely to be the taxpayer. The only way to stave off disaster (and it’s not a guaranteed fix by any means) is to return the issuance of student debt to the private sector (aka private banks). The government is far too willing to give students all the debt they ask for, regardless of ability to pay. We need to put some grownups in charge of this mess. Right now Uncle Sam is happily handing out money to just about anyone, because it’s not Uncle Sam’s money; it’s yours and mine. This needs to stop, and pronto.

It reminds me of one of the proximate causes of the Great Recession: Congress basically forced banks to lend money to just about anyone who wanted to buy a house. Banks were encouraged to make loans on ridiculous terms, because in the end Freddie Mac and Fannie Mae bought every loan the banks could issue. Mortgage loans were made Willy-nilly, and the result was inflated home prices which collapsed, and a mountain of mortgage debt that had to be written off.

The government should NEVER be in charge of lending money to anyone. And for that matter, the government should never be in charge of providing any service (e.g., healthcare) to anyone.

Fred said...

What about police and the military?

Johnny Bee Dawg said...

Police and military ARE the government, itself, specifically authorized by State and US Constitutions.
If I recall correctly, North Dakota has the only state-owned bank in the US, and its authorized by the North Dakota Constitution.

If you want to grant the Federal government vast new powers over its citizens' very lives (like socialized medicine), you need to amend the US Constitution to allow it. All you need is 2/3 vote of Congress, and 3/4 votes of state legislatures.
We the People have done it over 2 dozen grant new powers to the Feds, and to limit their power.

Lefties hate having to persuade others of their grand plans.
Just ram it thru Congress, and keep the Supreme Court full of Statists to declare their new powers "Constitutional".

Fred said...

My question is whether Scott thinks it would be better to have private enterprise provide police and military services since he said the Federal government shouldn't provide any services.

Scott Grannis said...

Fred: My libertarian instincts tell me that there is no reason, a priori, to think that law enforcement and defense could not be turned over to the private sector. As a practical matter I seriously doubt that would ever happen. But the repeated failures of government (e.g, the Deep State, public education, government-run healthcare) should at the very least tell us that we have way more government involvement in our lives than we need.

Government should NEVER be in the business of providing services (e.g., welfare) that can be better and more efficiently provided by the private sector. Politicians don't have checks and balances on their behavior the way private charities, which must compete for funds, do.

Any expansion of government's role in the economy necessarily reduces private liberty. And the profit motive is a powerful disciplining force that is unfortunately not to be found in the public sector. Capitalism is the best system we have found to date to deliver the greatest degree of prosperity to the most people. Socialism has proven to not work.

Fred said...

capitalism is the best economic system and socialism is clearly a failed system. However, I and my children had a great experience with public schools and I think our police and military do a terrific job protecting us despite not having a profit motive for doing so.