1/9/19: U.S. Non-Financial Corporate Sector: Stagnation in Net Value Added

Value added by the U.S. non-financial corporates has been languishing well below the cyclical peak for some months now:

In fact, since Q3 2016, net value added by the non-financial corporations has been running below long run trend, and has been basically flat. This suggests substantial pressures build up in the economy, consistent with all previous early indicators of a recession. Interestingly, there is zero evidence of any improvement in the non-financial economy in the U.S. since 2016 election.

8/8/19: Upbeat Jobs Reports Miss Some Real Points

Unemployment claims down, the weekly jobs report seemed to have triggered the usual litany of positive commentary in the business media

But all is not cheerful in the U.S. labor markets, once you start scratching below the surface. Here are two broader metrics of labor markets health: the civilian employment to population ratio and the labor force participation rate, based on monthly data through July:

The above shows that

1. Civilian labor force participation rate is running still below the levels last seen in the late 1970s, and the current recovery period average (close to the latests monthly running rate) is below any recovery period average since the second half 1970s recession end.
2. You have to go back to the mid-1980s to find comparable 'expansion period'-consistent levels of labor force participation rate as we have today. This is dire. Current recovery-period and President Trump's tenure period averages for labor force participation rate sit below all recovery periods' averages from 1984 through 2006. 

So much for upbeat jobs reports.

1/9/19: 'Losin Spectacularly': Trump Trade Wars and net exports

U.S. net exports of goods and services are in a tailspin and Trump Trade Wars have been anything but 'winning' for American exporters. You can read about the effects of Trade Wars on corporate revenues and earnings here: https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html. And you can see the trends in net exports here:

This clearly shows that 'Winning Bigly' is really, materially, about 'Losin Spectacularly'. Tremendous stuff!

31/7/19: Canary in the Treasuries mine

Judging by U.S. Treasuries, things are getting pretty ugly in the economy:

The gap between long-dated bond yields and short-dated paper yields has accurately predicted/led the last three recessions (the latter are marked by red averages in the chart).

13/7/19: A New Era of Entrepreneurship? Not in Data so Far...

We are living in the Great New Era of Entrepreneurship that started in 2013 (according to someone at Forbes) and the academia is pumping high entrepreneurship training and education (the Golden Era, according to some don from Stanford). Living in all of this 'game changing' stuff around you can be daunting, inducing FOMO and other behavioural nudges toward dropping everything and launching that new unicorn doing something disruptive and raking in the miracle dollars that everyone around you seems to be minting out of thin air. Right?

Well, not so fast. Here's the data from the U.S. - that 'super-charged engine of enterprising folks':

Hmm... anyone can spot the 'New Era' in entrepreneurship out there, other than the one with historically low rates of business creation?

13/7/19: Great Recession in Europe and the U.S. Great Depression

In a one-chart summary, why Euro has been a painfully failing experiment in monetary policy:

The above chart shows the comparative in real GDP levels between the Great Depression in the U.S. (1929-1936) and the Great Recession in Greece (starting from 2008 with data through 2018, and then using IMF estimate for 2019 published in April 2019 WEO, and IMF WEO forecasts from 2020 through 2024, data from 2025 on is taken at a linear trend using 2024 growth forecast). In simple terms, the U.S. real GDP reached its pre-Great Depression levels in the 7th year following the onset of the crisis, although some estimates put this to year 10, depending on the base used.  Greek Great Recession is now in year 11, and counting. By the end of 2019, the IMF estimates that the Greek economy will be 22.1 percent below the 2007 levels, and by 2024 (the furthest IMF forecast we have), it is expected to be 16.2 percent below the 2007 levels.

While one can make the point on Greece's 'unique status' as an economy that should never have been in the Euro in the first place, three arguments stand out against this point:

1.  Greece is a member of the Eurozone, and if this membership was attained over all rational arguments against it, this very fact shows that the Euro is a poorly structured monetary arrangement; 
2. As a member of the Eurozone, Greece should have been provided with monetary and fiscal tools for addressing the massive crisis the country experienced. Per chart above, it clearly was not accorded such: and
3. Greece is hardly the only economy in this situation. Italy is patently in the same boat, and as shown in the chart below, nine out of the EA19 states have experienced longer duration of recovery from the Great Recession than the U.S. from the Great Depression.

3/7/19: Record Recovery: Duration and Perceptions

While last month the ongoing 'recovery' has clocked the longest duration of all recoveries in the U.S. history (see chart 1 below), there is a continued and sustained perception of this recovery as being somehow weak.

And, in fairness, based on real GDP growth during the modern business cycles (next chart), current expansion is hardly impressive:

However, public perceptions should really be more closely following personal disposal income dynamics than the aggregate economic output growth. So here is a chart plotting evolution of the real disposable income per capita through business cycles:

By disposable income metrics, here is what matters:

1. The Great Recession was horrific in terms of duration and depth of declines in personal disposable income.
2. The recovery has been extremely volatile over the first 7 years.
3. It took 22 quarters for personal disposable income to recover to the levels seen in the third quarter of the recovery.

So what matters to the public perception of the recovery in the current cycle is the long-lasting memory of the collapse, laced with the negative perceptions lingering from the early years of the recovery.

To confirm this, look at the average rate of recovery in the real disposable income per quarter of the recovery cycle. The next two charts plot this metric, relative to the (a) full business cycle - from the start of the recession to the end of the recovery (next chart) and (b) recovery cycle alone - from the trough of the recession to the end of the recovery (second chart below):

So looking at the trough-to-peak part of the cycle (the expansion part of the cycle) alone implies we are experiencing the best recovery on modern record. But looking at the start-of-recession-to-end-of-recovery cycle, the current recovery period has been less than spectacular, ranking fourth in strength overall.

Which is, of course, to say that our negative perceptions of the recovery are anchored to our experience of the crisis. We are, after all, behavioral animals, rather than rational agents.

2/7/19: Inverted Yield Curve

Inverting U.S. yield curve is one of the best early indicators of recessions. Or at least it used to be... before all the monetary policy shenanigans of the last 11 years. Regardless, the latest U.S. Treasury yields dynamics are quite disquieting:

20/6/19: Say Goodbye to the Trump Bump in Corporate Investment

Trump's investment boom... is vapour now.

And that is despite the fact that tariffs on China, threats of tariffs against Mexico, mini trade war with Canada and threats of a trade war with Europe - all supporting domestic investment all along... 

18/6/19: In May, 12 month forward probability of a U.S. recession has jumped up

The NY Fed estimated risk of recession (12 months forward) has hit another business cycle high of 29.62% for May 2020, up from 27.49% for April 2020, marking seventh consecutive monthly increase.

Historically, probability of a recession 9-15mo ahead of the actual recession realisation has been at 18.45%, which is significantly below the current running 3 months average of 28.06%.

To put these levels into perspective, here is the chart of the time series:

The current levels of the index are clearly in line with the historical trends for the 9-12 months recession expectations. More so, they are actually in line with 3-6 months recession expectations. In fact, we have to go back to 1967-1968 to find the only episode in the entire history of the data series where current levels of the index were not coincident with an actual recession or with 3-6 months-lagged realisation of a recession.

May 2020 reading is the ninth highest probability estimate for the probability of a recession in history for any period outside and actual recession + 6 months prior and 3 months after.

18/6/19: Obama v Trump: Jobs Creation

Who had the more impressive numbers in terms of jobs creation: President Obama or President Trump? This question is non-trivial. For a number of reason.

Take first the superficially-simple comparative:

• On a y/y basis, average monthly change in total non-farm payrolls under the last 28 months of President Obama Administration was 2,704,000 using non-seasonally-adjusted data. For the first 28 months of the Trump Administration, the same figure was 2,394,000. So by this metric, things were better under Obama Administration last 28 months in office.
• The caveat to the above is that as jobs numbers grow, each consecutive period, new additions of jobs should be harder and harder to come up with, especially during the mature period of the expansion cycle. In other words, after some number of quarters of economic recovery, creating more new jobs gets harder, primarily because the pool of potential employees to be hired into jobs shrinks. So, adjusting Obama figures and Trump figures for this, we can use rate of change in 28 months averages. This is not easy to do, because we do not have consecutive 28 months periods of first rising, then falling jobs additions averages for any period, except for the 1990s. Back then, jobs creation first run at 483,000 monthly average in 1991-1993, 3,124,000 in 1993-1995, 2,889,000 in 1996-1998 and 3,080,000 in 1998-2000. So within upside cycle, the net decline in jobs creation was between 1.74% and 7.2%. Applying these to Obama Administration’s peak jobs creation rate over any 28 months period gives us the rate of Obama Administration cycle-adjusted jobs creation of between 2,509,150 and 2,656,775 - both of these figures are higher than the raw numbers for the Trump Administration’s first 28 months in office. 
• In monthly average jobs creation measured on m/m basis, Obama Administration’s last 28 months in offer yielded 128,000 monthly jobs additions on average. The Trump Administration’s comparable figure is 294,000, vastly outpacing Obama Administration’s record. This means that, in total,  during the Obama Administration last 28 months in office, the U.S. economy has created net 2,527,000. In Trump’s Administration 28 months in office, the economy generated 7,206,000 jobs. 
• The above figures, however, is heavily weighted against the last 28 Obama Administration period due to the final two months of the period coinciding with heavily seasonality-related effects (December and January effects). Controlling for seasonality effects, Obama Administration comparable net jobs creation over that period was 7,139,000 against Trump’s 7,206,000.
• Finally, looking at the entire jobs cycle, as illustrated in the chart below:

Note, I consider the period of Obama Administration with sustained jobs creation - a sort of
‘jobs creation upside cycle’ that started in March 2011. Based on this comparative, Obama Administration did outperform Trump Administration so far into the latter tenure in office (see steeper slope in the trend line for Obama Administration, and flatter slope for Trump Administration.


Draw your own conclusions out of all of this, but there are my top level ones:

1. Whilst it is other daft to argue whether one Administration was able to ‘create’ more jobs than the other - the comparatives are a bit too sensitive to differences in economic environments and yearly cycles, overall, Obama Administration’s last 28 months in office seem to have been creating comparable number of jobs to the Trump Administration’s first 28 months in office.
2. Trump Administration has seen more substantial monthly increases than Obama Administration did, but annually, Obama Administration outperformed Trump Administration in this comparative.
3. In overall terms, jobs creation remained similar across both Administrations to-date, once we adjust for skewed seasonality effects, but Obama Administration appears to have outperformed the Trump Administration over the cycle of jobs expansion.

16/5/19: Identifying Debt Bubble 4.0

Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:

The periods of significant leverage in the U.S. economy have been identified as follows:

• First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
• Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
• Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
• Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
• Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.

I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government. 

1/3/19: U.S. PMI is not at a Crisis levels

My take on today's ISM for Manufacturing data here: https://twitter.com/GTCost/status/1101512164584546304, with charts:

Chill-ax everyone… #ISM is not even close to signalling a serious trouble ahead… Not that it is a measure I would even consider for troubleshooting.

— Constantin Gurdgiev (@GTCost) March 1, 2019

16/2/19: Trump-o-rama taking a dip?

Summarizing the U.S. economic 'themes' of the last 21 years:

or put differently: 13 years of 'ugly', 8 years of 'euphoric'.

Source for the great chart (ex-my annotations): https://www.topdowncharts.com/.

11/1/19: Euromoney on U.S. and Global Credit Risk: 2018 in review

My comment on key trends in the U.S. credit risk changes in 2018 and a glimpse into 2019 'crystal ball' for Euromoney and ECR: https://www.euromoney.com/article/b1cmrkm17q1cm9/ecr-survey-results-2018-us-decouples-from-improving-g10-trend-angola-egypt-lead-africa-recovery.

22/6/18: 'Skeptical' IMF tends to be over-optimistic in its U.S. growth forecasts

In recent weeks, the IMF came under some criticism for posting relatively gloomy forecasts for the U.S. economy, especially considering the White House rosy outlook that stands out in comparison. see for example, WSJ on the subject here: https://www.wsj.com/articles/imf-sees-u-s-potential-growth-at-half-the-pace-of-white-house-estimates-1528995732.

Which begs two questions:

1. Does IMF have any grounds to stand on its forecasts divergence from the White House? and
2. Are IMF forecasts for the U.S. economy actually any good?

Firstly, the grounds:

Per above chart, the IMF is not alone in being less than exuberant about forward growth forecasts for the U.S. In fact, it is White House that appears to be an outlier when it comes to 2020-2023 outlook.

Secondly, per the question above, I crunched through IMF's semi-annual forecasts releases from April 2013 on (period prior to 2013 is too volatile in terms of overall fundamentals to take any forecast errors seriously). The chart below summarizes these against the actual outrun:

On the surface, it appears that IMF forecasts in recent years carried massive errors compared to outrun. So I did a little more digging around. I took 1, 2, 3, and 4 years-ahead forecasts, averaged them over different forecast releases, and estimated 90 and 95 percent confidence intervals for these. Here is the resulting chart:

What does the data tell us? It says that IMF forecasts have, on average, overstated actual growth outrun. In other words, IMF forecasts have been over-optimistic, not excessively pessimistic, in the recent past. More that that, IMF's current (April 2018 WEO release) forecast for the U.S. GDP growth is even more optimistic than already historically optimistic tendencies of the Fund imply. In other words, even though the first chart above shows the IMF forecast for the U.S. growth to be pessimistic, compared to that of the White House, in reality, IMF's forecasts tend to be wildly optimistic.

Average error for 1 year ahead forecast for the U.S. in IMF releases has been 0.037 percentage points (very small), rising to 0.476 percentage points for 2 years ahead forecasts (more material error), and 0.867 percent for 3 years ahead forecasts. Augmenting data (to achieve larger number of observations to 2000-2006, 2011-2014 periods, 4 years ahead average forecasts has been 0.867 percentage points above the outrun growth. And so on.

So, to summarize:

1. IMF is not unique in being less optimistic on the U.S. economy than the White House;
2. IMF's history of forecast errors suggests that the Fund tends to be overly optimistic in its forecasts and that current official Fund forecasts are more likely to be reflective of significant over-estimation of future growth than under-estimation;
3. IMF's forecasts more than 1 year out should be treated with some serious caution - something that applies to all forecasters.

15/518: Four macro charts that explain Trumpvolution

The current growth cycle has been the second longest on record:

Source: FactSet

But it has been much shallower than the previous cycles: "real GDP growth in the current expansion lags the other three expansions—by a lot. As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth we saw at this point in the 1991‑2001 expansion. The chart also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961‑1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982‑1990 expansion."

Source: FactSet

And here's a summary of why loading risks of recession onto households is not such a great idea: "Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991‑2001 and 1961‑1969, respectively. The reluctance of consumers to spend in this expansion is not surprising when you consider how much of the brunt of the last recession was borne by this group."

Households' net worth collapse in the GFC has been more dramatic and the recovery from the crisis has been less pronounced than in the previous cycles:

Source: FactSet

Hey, you hear some say, but the recovery this time around has been 'historic' in terms of jobs creation. Right? Well, it has been historic... as in historically low:

Source: FactSet

So, despite the length of the recovery cycle, current state of the economy hardly warrants elevated levels of optimism. The recovery from the Global Financial Crisis and the Great Recession has been unimpressively sluggish, and the burden of the crises has been carried on the shoulders of ordinary households. Any wonder we have so many 'deplorables' ready to vote populist? As we noted in our recent paper (see: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949), the rise of populism has been a logical corollary to (1) the general trends toward secular stagnation in the economy since the mid-1990s, and (2) the impact of the twin 2008-2010 crises on households.

15/4/18: US Trade Wars and the Global Economy

My interview for Icelandic TV on the threat of trade wars led by the U.S. :http://www.visir.is/section/MEDIA99&fileid=VTV094E2C7D-0F20-48CA-ADB4-8F8515C4B1E7

15/4/18: EuromoneyCountryRisk 1Q 2018 report

Euromoney Country Risk 1Q 2018 report (gated link) is out, quoting, amongst others, myself on geopolitical and macroeconomic headwinds to global economic growth:

Two interesting tables/charts:

My quote:

7/3/18: U.S. Economy: May Keynesian Economics and Fiscal Prudence R.I.P.

We've got an old problem, Roger. Deficits and their forward projections:

And the more detailed vision of the problem:

Now, keep in mind: we are accumulating these at the time of an expanding economy and continued accommodative monetary policies. In other words, the spring is being loaded on the double.

May both, Keynesian economics and Fiscal Prudence, R.I.P.