Hiking Into a Slowdown

It becomes ever more tempting to conclude that the timing of the Fed’s rate hike was really quite odd, even from the perspective of the planners – even though the U3 unemployment rate has fallen to a mere 5% and they are probably correct about the transitory nature of the currently very low headline “inflation” rate (as we have recently pointed out, actual monetary inflation currently stands at almost 8% y/y).

 

industrieImage credit: Fotolia

 

Recent economic reports have by and large not shown any noteworthy improvements – on the contrary. District manufacturing surveys are going from bad to worse, existing home sales just had another truly terrible month (this time bad weather can obviously not be blamed, but apparently there is a problem with filling in simplified forms) and even the Markit services PMI has suddenly undercut the entire range of economists’ expectations. Meanwhile, the growth rate in ECRI’s coincident index has just hit a 21-month low:

 

1-coincident indexECRI’s coincident index growth rate keeps falling. The weekly leading indicator has recovered from its lows (while remaining in negative territory), but we dislike the fact that this indicator is evidently strongly influenced by the stock market. In our opinion the stock market has long ceased to tell us anything about the economy.

 

In her press conference, Ms. Yellen inter alia went on about the “strong consumer” – as if one could consume oneself to prosperity. Both stronger employment and stronger consumption are a consequence of economic growth, not a cause of it. To believe otherwise, one needs to put the cart before the horse, based on the primitive Keynesian flow model of the economy (however, this model does not depict how the economy actually works).

A difficulty consists of the fact that capital consumption – i.e., a net loss of wealth – tends to masquerade as growing prosperity during a credit expansion. This is why the planners erroneously believe that growing the supply of money from thin air and artificially suppressing interest rates improves the economy. It is a bit like watching the erection of a Potemkin village and believing that there is actually something behind the facade.

Ms. Yellen always reminds us are that empirical data are the main guide informing Fed policy, but even those seem to contradict her point about consumers – to wit, growth in real personal consumption expenditures has just hit a 15 month low:

 

2-real PCEAnnual growth in real personal consumption expenditures by sectors

 

We have to briefly interpose here that we are not about to suggest what the Fed should or shouldn’t do. We are not armchair central planners proposing “better plans” for interventionists. Our only plan with respect to central banks is to argue for the urgent need to abolish them and adopt a completely unhampered free market in money and banking.

We are mentioning this because we don’t want new readers to confuse us with the many would-be social engineers that can be found elsewhere on the intertubes. The reason why we discuss central bank policy is the fact that it exists and that we all have to live with its consequences.

With that out of the way, we want to show a collection of updated charts from our friend Michael Pollaro, on what we think are key economic data points. We also want to point readers to a recent critical discussion by Mish regarding an “economic snapshot” paper produced by the NY Fed (we agree with his counterarguments).

As we have stressed on previous occasions, our focus is primarily on the business side of the economy, and within that, on the part that produces the greatest share of gross economic output, namely manufacturing. This is of course in keeping with the cause-effect vector mentioned above. The charts below show a somewhat broader array of data, i.e. they are not only about manufacturing.

 

Economic Data Snapshot

The aggregate data on business sales, inventories, employment, etc. are mainly updated until the end of October, resp. November. This is simply due to the respective official update frequencies. However, we can already infer from recent more up-to-date data releases (such as the Fed district surveys), that the trends shown in these charts are so far persisting.

 

3-Business SalesAnnual growth in business sales (red), inventories (green) and the inventory-to-sales ratio (blue) – click to enlarge.

 

Obviously, the last time declining business sales and a rising inventory-to-sales ratio were considered good things was “never”.

 

4-Business-sales-by-sectorBusiness sales by sector: y/Y change rate in overall sales (red), retail sales (green), wholesaler sales (purple), manufacturers sales (magenta) vs. the inventory-to-sales ratio (yellow area) – click to enlarge.

 

In typical business cycle fashion, industries in the higher stages of the production structure (further removed from the consumer) are showing the greatest volatility and are currently suffering the most due to the incipient downturn.

 

5-Busniness Inventories by sectorThis chart shows overall business sales in the yellow area and disaggregates the inventory-to-sales ratio (I/S) by sector. Retail I/S (purple), overall business I/S (blue), wholesalers I/S (green), manufacturers I/S (red) – click to enlarge.

 

6-Manufacturers, sales, orders, inventoriesSpotlight on manufacturing: y/y growth in new orders (green), sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

7-Retail sales and inventoriesSpotlight on retail sales: y/y growth in sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

8-Wholesale sales and inventoriesSpotlight on wholesalers sales: y/y growth in sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

The next two charts show growth in total business sales and inventories relative to growth in employment:

 

9-Business sales vs employmentYear-on-year change rate in total business sales (red), non-farm payrolls/ establishment survey (light green) and employment/ household survey (blue) – click to enlarge.

 

10-Business inventories vs. employmentYear-on-year change rate in the overall business inventory-to-sales ratio (red), non-farm payrolls/ establishment survey (light green) and employment/ household survey (blue) – click to enlarge.

 

What is noteworthy about the foregoing two charts is that a large gap has developed between employment growth and business sales – the last time such a gap was seen was when it occurred to the upside, as the recovery in business sales (not surprisingly) led the the recovery in official unemployment data after the GFC.

It is fair to assume that business sales haven’t lost their leading indicator qualities. Keep in mind though that employment data have become quite skewed though by the surge in part-time jobs (which leads to what used to be counted as one job being counted as two) and the sharp decline in the labor force.

Another comparison chart worth looking at is the following, which contrasts business sales with junk bond spreads. The negative correlation between these two data series is more direct, although slight leads and lags do of course happen as well:

 

11-junk vs business salesBusiness sales growth (green) vs. junk bond spreads (blue) and the FF rate (red) – click to enlarge.

 

Lastly, as an addendum to the data on retail sales, here is a chart of the Redbook Index (weekly y/y growth rate in same-store sales). Over the past year this indicator has weakened considerably:

 

12-RedbookRedbook Index: a sales-weighted index of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores.

 

None of this looks particularly encouraging, but it needs to be stressed that there is no guarantee yet that this weakness will lead to an official recession in the near term. However, if a recession is indeed in store, we should expect more definitive signals to this effect to emerge quite early next year.

 

Additional Remarks – Production Structure and Yield Curve

The long period of ZIRP and historically strong money supply growth has kept our boom-bust index – the ratio of capital to consumer goods production – moving sideways at an extremely elevated level for an unusually long time. We can infer from this that there is probably more capital malinvestment in the economy than is superficially obvious.

 

13-Cap vs. Consumer goods productionThe ratio of capital goods (business equipment) to consumer goods production, a rough indicator of the distribution of factors of production between the different/opposing stages of the capital structure. Typically it rises sharply during credit booms and contracts during bust periods – click to enlarge.

 

Finally, we wanted to briefly mention the yield curve. As a result of the Fed’s oddly timed rate hike, the yield curve has flattened quite rapidly recently. This brings us to the question whether it is necessary for the curve to invert before a recession can be forecast with confidence. As we have previously discussed (see The Yield Curve and Recessions), per experience this is actually not the case in ZIRP (zero interest rate policy) or near-ZIRP regimes.

Below we reproduce a chart from said article that shows the past six recessions in Japan contrasted to the Japanese yield curve (represented by very short and very long durations, i.e., 3 months vs. 10 years). Only one of them – the one that began immiediately after the major bubble of the 1980s had burst – was actually preceded by an inversion. We suspect that a mere flattenig of the curve must already be seen as a major warning sign during or on the heels of a ZIRP regime.

 

14-Japanese-yieldsJapan: the yield curve and recessions – there have been five recessions in the past 2 decades that were not preceded by an inversion of the yield curve. What they all had in common was that they occurred during the ZIRP era – click to enlarge.

 

Conclusion

We are a bit worried that a consensus seems to be emerging lately that the Fed will soon “backtrack” from its rate hike. For the time being we believe so as well though, based on the data backdrop discussed above. It could however be that the Fed will get one or two more hikes in (even the BoJ once managed to implement two consecutive rate hikes – back when most of today’s stock market traders were still pimply teenagers).

This will largely depend on whether the above trends persist in the near term, as well as on asset prices, especially the stock market. All of this will in turn depend on whether the overarching downtrend in money supply growth rates continues (or perhaps even accelerates), or reverses again. So there are a great many moving parts, and we will have to wait and see how they develop. We would however say that it mainly comes down the question of whether the backtracking happens somewhat “sooner” or “later”.

 

Addendum: Modified Ned Davis Method Signal

We actually forgot to alert readers that according to Frank Roellinger, the Modified Ned Davis Method has gone 50% short the Russell 2000 as of Friday, December 11. However, net-net no major move has taken place yet since then (the RUT is actually a trifle higher as we write this). As always, the system’s signal to switch from flat to partly short represents an additional short to medium term warning signal for the stock market until it is rescinded again.

 

Charts by: ECRI, Michael Pollaro, St. Louis Federal Reserve Research, investing.com

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Janet Yellen's 78-Month Plan for the National Monetary Policy of the United States
      Past the Point of No Return Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it.  This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return.  That's when the cucumber has pickled over and the prospect of turning back is no longer an option.   Depravity and bedlam through the ages. The blue barge of perdition in the...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com