Jack Dunn - Reclaiming Common Sense

 The Sky is not falling - There aren't any Rain Clouds on Radar.


Most economists have a hard time projecting the possibilities for this month's ADP report or monthly Employment Situation Report. There are some people who are projecting a weak jobs number of 157,000 non-farm payroll "jobs" being added to the economy. These economists do not even realize that these are Current Employment Situation workers. The Current Population Survey (CPS) data measures jobs.  There are some people who are projecting a recession during 2020. One noted economist was calling for a recession from which we would never recover immediately after the 2016 election was called in favor of President Trump:


"It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?


Frankly, I find it hard to care much, even though this is my specialty. The disaster for America and the world has so many aspects that the economic ramifications are way down my list of things to fear.


Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.man "


Paul Krugman


Now there are economists projecting five rate hikes this year. Some are projecting  a recession during 2020 during the run-up to the election. Others are saying that this upward momentum cannot last "forever." Let me use a technical economic term. Duh.We are coming out of a period of quantitative easing induced stock market gains and transitioning to a period of time where the market should be responding to earning, profits, and growth projections. It was nearly eight months after the dire warning of Krugman that former Federal Reserve Chair Janet Yellen proclaimed there would not be another financial crisis "within our lifetime." Reality is somewhere between "The Sky is Falling" Krugman and "The Sun will Come Out Tomorrow" Little Orphan Janet.


Not all clouds are rain clouds. I used to live in Wisconsin. There was one Winter where the weather forecasters were describing a record number of hours without direct sunshine. Clouds would roll in before sunrise and clouds would roll out after sundown. Gray days. Cold nights. To the best of my memory we did not receive much snow during those cloud-filled weeks of weather. Just enough to throw down a blanket of white that first day that everyone scrambled to find those long lost sunglasses.


Not everything is an indicator of Nirvana or End Times. I receive some praise and some criticism for my work. This is reality. This column attempts to demystify the data. The data that receives headlines are the seasonally adjusted data, plural. The economy is more than the monthly jobs report or the quarterly GDP numbers. There was a post on a friend's Facebook timeline that caught my attention this past weekend. Judd Legum, a person of whom I have never heard, said to ignore the 4.1% GDP growth during the second quarter of this year. He was promoting that  "Real Wage loss" between 2006 and now is at 9.6%. Who was President from 2009 through 2016. He was promoting that stock buy-backs are bad for the economy. He was also promoting pay disparity between the CEOs and the average workers wages as basically unacceptable. What are the important numbers? You could ask a number of economists, and a number of market analysts, what they watch and you would get similar results in different orders, and you would probably get some wild cards in each list. Here is what I watch and what they mean to me right now.


Jobs. Jobs. Jobs. Jobs. Jobs. Jobs. There are more pieces of data in the monthly jobs report than just the "headline" seasonally adjusted non-farm payroll number. There is the private sector "payroll" number. There are the number of full-time and part-time jobs added and lost every month. There are the number of participants, the number of unemployed workers, and the missing participants. This column examines the rolling year/lagging year non-seasonally adjusted (NSA) Current Employment Statistics (CES) private sector worker growth rate, the monthly growth rate, the seasonal factors used to convert the NSA CES data to the seasonally adjusted (SA) CES data, and the revisions to the prior months' data, plural. Each month has the release of the Advance current month data, preliminary prior month data, and the "final" data from the reporting two months ago. I place "final" in quotations because this data is revised many times after the final revisions are posted. Beyond the headline data there is data on wages, the number of workers in each sector, the number of male full-time job holders, the number of female part-time workers, the number of multiple job workers, the level of employment for people by age group and ethnicity.  It takes more than a week to cull through all of the data. This column produces data on the "U-7" unemployment rate. The government only produces unemployment data from U-1 through U-6. U-7 is used to compare similar unemployment rates with dissimilar participation rates.


Weekly Unemployment Claims, First-time and Continuing Claims. There was a time during the recession and the recovery where the breaking news at the bottom of the 8:00 hour on Thursdays was "First-time Unemployment Claims remain below 300,000." Normally there is a creep up in unemployment claims prior to a spike. I watch the beginning of January spike and the end of Summer bottom. A higher high is not a good thing. A lower low means that we may continue to see the trend continue for a while. Normally the first time claims bottoms during the the final  weeks of September and the continuing claims data bottoms during the first week of October. People were obsessed with the seasonally adjusted data. They have missed some substantial milestones in the non-seasonally adjusted data.


Existing Home Sales: Units, Inventory, Average Sales Price. The percentage of individuals/families that own their residence peaked during 2004. The number of homes sold peaked during 2005. The average sales price, prior to the Great Recession, peaked during 2006. Inventory peaked well after the recession started and "caused" sales prices to plummet. The existing home data has only been available back through 2009. You can see from the "July Total Units Sold" histogram that during 2001, prior to September 11th, sales had a slight uptick from the 2000 level and that this continued during 2002, 2003, 2004, and 2005.There was no housing recession during 2001's recession. Units sold matter. Units for sale dictate how many units can be sold. The rate at which the average sales price grows is captured in the Consumer Price Index (CPI) Data on inflation. Other than the jobs number, this number is probably important to the majority of Americans. Some years get off to a slow start and some get off to a fast start. Some months the lower home inventory sells and brings down the average sales price and some months the higher home sales price homes sell boosting the sales price average. Right now we are seeing some strengthening in the inventory level and some consistency in units sold. The market appears to be in a "Goldilocks" moment, not too hot, not too cold.


New Construction Data: Starts, Units Under Construction, and Completed. The simple answer is that we need starts to create units under construction, we need units under construction to generate completions, and we need completions to boost inventory and allow for new home sales. Starts and completions are rarely ever "in balance." Either starts get ahead of completions and units under construction units surge or completions pick up pace and units under construction wane. New construction generates new home sales


New Home Sales. New home sales are data is important because of the spin-off sales in retail: Furniture Furnishings, Electronics/Appliance, Home and Garden sales, even Automobile sales for those new garages. The Great Recession was a jobs recession, an existing home sales recession, a new home sales recession, and a retail recession which generated a wage recession and a revenue recession, which was all captured by the official GDP recession. New home sales, beyond generating retail sales generate supplemental jobs in professional business services, retail sales, restaurant sales, food and beverage sales, and many other jobs. Are we selling as many new homes as we were during 2004, 2005 and 2006? Nope. Are we selling as many new homes as we were during 1994, 1995, or 1996. Nope. Are we seeing gradual improvement? Yes. We have sold more homes than we have during 2008 through 2017, year to date.

Retail Sales Matter. According to those Chicken Little and "Annie" economist 70% of our economy is related to consumer spending. Retail sales only accounts for roughly 30% of our economy this year. Right now we are on track for a $20 trillion economy and a $6 trillion retail sales year, the first ever for both. We spend roughly 33% of our income on Shelter. So, we spent roughly two thirds of our income on retail and residences. There are empty storefronts in malls. There has been a shifting the  to on-line sales. We had a shift to catalog sales and Wal-Mart/Big Box stores during the 1980s and 1990s. The Internet came to life during the 1990s and early 2000s. The Green line in the July MARTS retail graph represents non-store retail (catalogs, Internet.) Low gasoline prices during 2015 and 2016 were deemed a "Gasoline Stimulus" and not a "Gas Station Recession." Almost all sectors have surpassed their pre-recession levels of sales.We can see that electronics and appliances, while they may be a large part of our day to day lives, are not a large part of the retail sales market. The Current Yer 5ar data is on a record pace. The rolling year data has been consistently over 5% this year. We are in a Retail Renaissance, not a Retail Ice Age.


Consumer Price Index - Inflation or Deflation or Both. The Consumer Price Index (CPI) data has been showing Commodity Deflation and Service Inflation for an extended period of time. We have Shelter Inflation. We have medical inflation. The problem here is how the components are weighted during the year. Health Insurance supposedly only takes 1.00% of our income. It only comprises 1.00% to 1.05% of our basket of goods.Even as shelter inflation stays steady at 3% the percentage of our monthly "nut" has dropped. Do they assume that people are not moving and that their costs are relatively fixed? The concern of some economists is the difference between "real wage growth," adjusted for inflation, and "nominal wage growth." Weekly wages have been rising. We saw some flattening of the curve during 2009 and 2015. The question is which sectors are doing better and which are not. We have a large portion of the economy working in "Leisure and Hospitality" and "Trade, Transportation, and Utilities." These are two of the lowest paying sectors in our economy. The real impact is seen when weekly wages increase and workers increase together. The combined impacts are earnings growth - larger gross wages to be spent in our economy. The Current Employment Statistics data has information on wages and workers. The problem with the CPI data is that there is considerably more variation than with the wage data. The CES Data is available in non-seasonally adjusted  and seasonally adjusted data formats. The CPI data is also available in the two formats. The problem here is the "weighting" is, in effect, another form of seasonal adjustments.


Gross Domestic Product. The "GDP" number that is referenced in the press is the hypothetical growth for the year if we grow for four quarters at the same rate that we grew during the current quarter, seasonally adjusted, of course. The data that is used comes from a variety of resources. The four main components are Personal Consumption Expenditures, PCE, Gross Private Domestic Investments, GPDI, Imports/Exports, and Government Consumption Expenditures. The talking heads that say that imports don't impact GDP are very mistaken.Imports are a negative to the GDP when imports exceed exports. The GDP data was revised back to 1929 with the release of the Advance Second Quarter GDP data for 2018. That is not a typo. The data was revised back past the "Great Recession," past the "Dot Com Crash," past "everything," back to the Great Depression. A second value of GDP that does not garner as much attention as it probably should is the "Same Quarter"
 growth rate. In theory, because you are comparing data from the same season, this should give a better idea of how the economy is growing. Or should I say "how the economy was growing." The data for the "annualized" one quarter data is three months old when it is released in its advance form and five months old when it is in its "final" form. The data for the "same quarter" data is in the same boat, and depending when it is being used, it may or may not have undergone the "annual revisions." The economy was slowing its growth between 2015 and 2016. We have seen steady improvement since the third quarter of 2016. GDP matters because it is part of a metric for how much debt the country is carrying. The country"can" carry more debt if there is a larger base to support it.


Revisions Matter. If data is revised higher for prior months this "borrows" growth from the current reporting period. If the July jobs data is revised higher this Friday by 30,000 SA CES workers that borrows 30,000 from August. A 230,000 or 330,000 SA CES worker number becomes 200,000 or 300,000. If starts are added to July then the growth, or drop, in starts during August is diminished or magnified. The revisions to the SA CES worker data shifted potential worker growth from 2018 back to 2016 and 2017. Improving rolling year CES growth rates were diminished to the point that the rolling year growth rate was reported as dropping. The same is true for the ADP data. The same is true for the GDP data.


A month is not a trend. There are monthly variations. Sometimes the revisions to the prior month's data means that the growth from month o month is more than expected. When the rolling year data is measured we see that we are up over the prior year. The current month data may have had a large, seasonal drop, from the prior month and yet, it might not be as great a drop as the prior year same month data. If the current year data is ahead of where we were during the prior year then we are growing. If it is lower than the prior year same month cumulative data then we may be slowing.


Rolling Year and Current Year data. If we are growing at a faster rate during the same month of the year this year as compared to last year, for it and the eleven months prior,  the economy is growing. If we are selling more units through the current month of this year as compared to the same period of time last year then the economy is growing. Data can be projected forward using either method. If the projection for the current year is higher than the rolling year data then the current year is improving. If the current year data is somewhere between two or more years then the end of the year data, absent an economic surprise, should trend to a point between those end of year data points.


There are more economists than Chicken Little, Pollyanna, Annie, or Goldilocks. There is a parable of the blind men. One man stretches out his hand and feels a rope. Another blind reaches out and feels a sizable tree trunk. Another blind man feels something like a fire hose. A fourth blind man feels cold, rough wall. If they had been able to see they would have realized that they were all examining an elephant from a different perspective. The tail was the rope, the tree trunk was a leg, the hose was the elephant's trunk, and the rough wall was the elephant's side. An out of work worker may obsess over the jobs report or the weekly unemployment claims data. A home owner may be concerned regarding interest  rates or existing home sales. A builder may obsess over starts and completions and new home sales. Very few people are really concerned regarding inflation, other than employers who may have to give cost of living allowances for rising inflation and some workers who are bordering between positive and negative cash flow. GDP? Very few people can tell you the four main components of GDP, nonetheless what it really means.


The attention span of most people regarding the economy is about five seconds. Big words make eyes glaze. The belief that is being promoted is that this economy is "too good to be true." The belief while former President Obama was in office was that 2% GDP growth was the best we could expect. We are now approaching 3% for the end of this year and 4% to 5% for the quarter to quarter growth for the third quarter. We only have one month of data for this quarter so it may be a month or two before we have enough data to say which way it is going. Did the President tweet Something? Is Tesla Derangement Syndrome still in place. Tariff Derangement Syndrome? Twitter derangement Syndrome? What does the latest poll reveal? The economy is more than one report or one month of reports. The economy is more than one stock. We had a nearly two year pause in the Dow Jones Industrial Average. The Dow went up 83.48 points between December 19, 2014 and November 4, 2016. The media is "concerned" if we don't grow by 84 points during a day or a week.


Legum or Legume? Company Buy-backs? That helps the stock market, pension funds, and individual investors. Higher dividends do the same things. Wage growth is negative since 2006? Okay. That is how far back the CES wage data has been maintained. Just because a spokesperson says it doesn't mean that it is true. Examine the unadjusted data. Take out the seasonal factors. Take off your part-affiliated filters. Are you employed. Are your friends employed? Family? Neighbors? The is a trope: "A slowdown is when you hear people are losing jobs, a recession is when you know people who have lost jobs, and a depression is when you and your friends are out of work." Jobs are being created. Workers are being added to the economy. Wages are rising. Gasoline prices are not the highest that they have been. Homes are being built. Homes are being sold. Don't let Mr. Bean, Chicken Little, Polyanna, or Annie be your economist. Look at your situation and say "Am I better off than I was during 2016? 2017?" The economy is an elephant. You have to open your eyes and examine all the data.


It's the economy.