I have posted a table with data on a large number of economic variables -- most of which are based on the flawed "official" data for Rhode Island over the past twelve months: http://www.llardaro.com/current_performance.htm . As horrible as the labor market data are, remember these will all be revised higher eventually, so things here are not as bad as the data make things appear.
Early next week I will be releasing the July report for my Current Conditions Index. Stay tuned!
Friday, September 14, 2012
Tuesday, August 14, 2012
Current Conditions Index: June 2012
Below is an abbreviated version of the June Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
..............
..............
Rhode Island ended the second quarter on a rather mixed
note. While the “official” labor market data continue to depict an economy that
is not only falling off the proverbial “cliff,” but that has entered into a
double-dip recession, a news release from the Governor’s office, based on
analysis from the Department of Labor and Training, stated that employment here
is not actually falling, as the DLT monthly data continue to show, but has
actually been increasing for some time now (the release covered the first
quarter of 2012). Apparently, this came as a big surprise to much of this
state’s media, even though the errors with the “official” labor market data
were publicly acknowledged by the DLT months ago and I have been discussing
all of this regularly in my Current Conditions Index reports. Recall, this data
divergence caused me to begin providing two CCI values each month — one based
on the “official” data and the other using my simulated labor market
values.
What do we actually know overall about Rhode Island’s
current economic performance? Rhode Island’s economy continues to be in a tepid
recovery that began in February of 2010, now 28 months old. While economic
reality here is far better than what the “official” data show, the non-flawed
data indicate that this recovery displayed some loss of momentum during the
second quarter that will likely continue moving forward. It is important to
note, however, that even using the flawed “official” labor market data, the
Current Conditions Index never gave a recession signal. Furthermore, based on
my simulations (the other CCI values listed), Rhode Island’s economy has been
able to sustain some of the momentum it gained during the second half of 2011,
although this that momentum bas begun to erode based on the performances of
several key individual indicators.
According to my econometric models, there were three
noteworthy but problematic indicator changes in June. First, payroll
employment, which has been rising for some time now on a yearly basis (albeit at
declining rates) actually declined. Second, this employment weakness translated
into an uptick in Rhode Island’s monthly Unemployment Rate from my
projection of a 10.7 percent rate in May to 10.8 percent in June. Finally, the
rate of growth in a very important labor market indicator, Private
Service-Producing Employment, has slowed dramatically over the past two
months, barely increasing in June.
See the full report at: http://www.llardaro.com .
Wednesday, August 1, 2012
Upcoming Employment Data Revisions: "Official" Data Far Off Mark
For several months now, I've been pretty much alone noting how payroll employment in Rhode Island would be revised substantially higher, both in my Current Conditions Index reports and prior Blog entries. Over this period, I have continually stated how employment here is behaving very differently than what the official data were showing. The basis for this dates back to a number of months ago when the Rhode Island Department of Labor and Training (DLT) stated at the most recent Revenue Estimating Conference that employment as of the end of 2011 had not been declining, but actually rising. Based on this, I dusted off my econometric models and began generating projections of what I believe payroll employment would ultimately be revised to.
This was a very lonely endeavor, as I appear to have been the only person in this state noting that the official data were incorrect and far too pessimistic. So, while everyone continued to say that Rhode Island was on the verge of a recession, something I too had said until I learned of the possible revisions, I tried in vein to note that this was very far off the mark. And, even if we were to eventually fall to a double-dip recession, presumably based on global weakness or national weakness, at least we would have some margin for error.
Today, the DLT and Governor Chafee released a report confirming substantial future upward revisions to our state's payroll employment data. According to this press release:
"A recent analysis of tax data shows thatRhode Island
job growth exceeded original estimates for the first quarter of 2012, according
to the RI Department of Labor and Training ... The new estimate for Rhode
Island-based jobs as of March 2012 is 464,700 jobs, up 7,000 from earlier
numbers reported in April. The earlier estimate indicated that Rhode
Island-based jobs had dropped over a year's time by 2,200. However, the new
estimate shows that Rhode Island-based jobs had likely increased by 4,800 from
March 2011 to March 2012."
This is consistent with what my econometric models had been showing. Ironically, my estimates were a bit too low, as they showed a clear uptrend since October of last year, but to a level below the apparent upward revision. The chart below (click to enlarge) shows the "official" data and my estimates.
Based on this, let me reiterate a few points I have been making over the past several months:
This was a very lonely endeavor, as I appear to have been the only person in this state noting that the official data were incorrect and far too pessimistic. So, while everyone continued to say that Rhode Island was on the verge of a recession, something I too had said until I learned of the possible revisions, I tried in vein to note that this was very far off the mark. And, even if we were to eventually fall to a double-dip recession, presumably based on global weakness or national weakness, at least we would have some margin for error.
Today, the DLT and Governor Chafee released a report confirming substantial future upward revisions to our state's payroll employment data. According to this press release:
"A recent analysis of tax data shows that
This is consistent with what my econometric models had been showing. Ironically, my estimates were a bit too low, as they showed a clear uptrend since October of last year, but to a level below the apparent upward revision. The chart below (click to enlarge) shows the "official" data and my estimates.
Based on this, let me reiterate a few points I have been making over the past several months:
- Rhode Island is not on the verge of a double-dip recession;
- Our state's unemployment rate is not the currently-published 10.9%, but lower, based on the higher payroll employment numbers. My models project a 10.7% rate as of May; and
- As good as these results are, my models agree with the existing data that Rhode Island's labor force has been, and continues to, decline.
So, at this point, let me take the leaders of our state and its media to task for being far too pessimistic about the state of Rhode Island's economy. Think about that for a moment: me, Leonard Lardaro, accusing our leaders and the state's media for being too negative! Ain't that a bitch!!
Let me conclude by stating something that this points to, which I have been saying for far longer than I can remember: Accuracy is far more important than tone!
Thursday, July 19, 2012
Current Conditions Index: May 2012
This is an abbreviated version of the full Current Conditions Index report for May. The complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .
On a year-over-year basis, four of
the five non-survey-based CCI indicators improved. Only three of the five
showed improvement on a monthly basis, though. Retail
Sales surged by 9.9 percent compared to last May, its ninth consecutive
improvement. To some extent this is weather related. The skilled Rhode
Islanders we rent out to neighboring states who bring their income home with
them also directly impacts this indicator. Overall, such substantial Retail
Sales momentum argues against making any recession call. ......
The remainder of this report and the complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .
Rhode Island’s economic outlook in May is similar to that
from April: the current tepid recovery is continuing, although signs of a loss
of momentum have become more readily apparent. The good news is that Rhode
Island is still in the recovery that began in February of 2010, which as of May
reached its 27th month. The concerning news is that like the US, our rate of
improvement has slowed.
In discussing this, I am not referring to the questionable
“official” labor market data currently being released by the DLT. According to
those figures, payroll employment here has now either declined or remained
unchanged on a year-over-year basis for ten consecutive months. I challenge
anyone who chooses to believe those numbers to reach any conclusion other than
that Rhode Island has already entered a double-dip recession. In fact, even the
DLT has admitted publicly that a number of those published year-over-year
employment declines never occurred — they will be eliminated when the data are
revised in coming months.
Fortunately, if we focus on more accurate data and the
Current Conditions Index, which is a broadly based index, it is clear that some
of the momentum we witnessed as 2011 ended and we moved into 2012 has begun to
fade. While the pace of economic activity here isn’t all that great, my
econometric models show that payroll employment has slowed to an annual growth
rate of around 0.3 percent. The Current Conditions Index for May, based on the
“official” data, shows a reading of 58, once again in the expansion range. The other
displayed value, 67, is the likely value when the “official” data are
eventually revised. Based on those alternate values, the CCI has now moved from values
around 75 down to 67. As I have noted for several months now, it is the persistence of these
expansion range CCI values that matters the most for now.
The remainder of this report and the complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .
Tuesday, July 10, 2012
Is Government Employment in RI falling?
Over the last six years, total government employment in Rhode Island appears to have fallen a great deal -- probably more than most of us might have thought possible at one time. Obviously, all of the budget cutting that has occurred since 2006 has played a role in this. One might also think that the recession itself would also have had a large negative impact. However, the stimulus plans from the past few years actually helped Rhode Island and many other states avoid state employee layoffs, although this type of help appears to have now ended.
Let's take a look at government employment in Rhode Island, which consists of federal, state, and local government employment. The chart below shows this going all the way back to 1990 (click to enlarge).
Total government employment peaked here in March of 2006 at 66,900. Over the next six years, through March of 2012, it declined to "only" 59,800, which was a 10.6 percent drop. Do we conclude from this that our state's public sector has truly contracted more than it should have and that no further declines should occur? Hardly. The chart above looks at government employment in absolute terms, independent of anything else. For those of you who have read many of my posts, this is not the correct way to approach this -- a relative view is more appropriate.
Our relative view is accomplished by looking at government employment relative to overall (payroll) employment. This is shown in the next chart (click to enlarge) that covers the same time period as the original chart.
Several things should jump out from this chart. The most obvious feature is the longer-term (secular) downtrend in government's share of payroll employment in Rhode Island. To help explain this to persons who might find this chart confusing, let me point out that government's share declines when it falls relative to overall employment. This does not necessarily mean that government employment, or for that matter, payroll employment, is declining. During periods of economic growth, this indicates that government employment grew less rapidly than did payroll employment.
The second significant feature is that starting in November of 2007, one month before our state's employment peak, government's employment share began rising, as it would through May of 2010, from a 13 percent to 13.8 percent of payroll employment. This reflects the fact that over this period, government employment was declining by less than did payroll employment. While this uptrend lasted for three years, government's share of payroll employment eventually began to decline once again as it now has for the past two years.
The final noteworthy element of this chart is that in spite of the decline in government's share over the past two years, government's share has remained above the levels consistent with its secular downtrend. This is reflected in the way the line for government's share has stayed above the dashed gold line reflecting the secular trend. So, while it might appear that a valid conclusion from the first chart is that Rhode Island's government employment may well have contracted enough, or perhaps too much, this is less obvious when viewed in the more proper context of government employment in the setting relative to overall employment.
To help better comprehend what underlies these charts, the next chart disaggregates the information contained in the second chart, looking at the shares of each of the three components of total government employment (click to enlarge).
Since 1990, state government employment's share has fallen noticeably, from 5 percent of payroll employment in the early 1990s to 3.5 percent at present. As this was occurring, federal government employment's share has remained virtually unchanged, starting at 2.4 percent in 1990 and falling only slightly to 2.2 percent at present. Clearly, local government employment's share rose from 6.6 percent in 1990 to its peak of 8 percent in March of 2006. At present, local government employment's share remains at 7.4 percent of payroll employment. That is highly significant, since local government employment is by far the largest component of total government employment in Rhode Island, exceeding the sum of the two other components. Within local government employment, local education employment comprises approximately two-thirds of its total.
Overall, as of May 2012, local education employment, the largest sub-component of total government employment in Rhode Island, was 22,800, or 2.8 percent of service-producing employment. While we might not be able to reduce that number very much through educational reform and other changes, the cost of financing K-12 education in this state is very high -- among the highest in the country on a per-pupil basis. Sadly, the "output" resulting from this very high expenditure is less than satisfactory. This points to relatively low productivity, if one were to relate attainment to expenditure. However, this is a very complicated issue. Suffice it to say for now that managing government here, as should be obvious from the situation for local educational employment and expenditure, is far more of a quality issue than one of just quantity.
Let's take a look at government employment in Rhode Island, which consists of federal, state, and local government employment. The chart below shows this going all the way back to 1990 (click to enlarge).
Total government employment peaked here in March of 2006 at 66,900. Over the next six years, through March of 2012, it declined to "only" 59,800, which was a 10.6 percent drop. Do we conclude from this that our state's public sector has truly contracted more than it should have and that no further declines should occur? Hardly. The chart above looks at government employment in absolute terms, independent of anything else. For those of you who have read many of my posts, this is not the correct way to approach this -- a relative view is more appropriate.
Our relative view is accomplished by looking at government employment relative to overall (payroll) employment. This is shown in the next chart (click to enlarge) that covers the same time period as the original chart.
Several things should jump out from this chart. The most obvious feature is the longer-term (secular) downtrend in government's share of payroll employment in Rhode Island. To help explain this to persons who might find this chart confusing, let me point out that government's share declines when it falls relative to overall employment. This does not necessarily mean that government employment, or for that matter, payroll employment, is declining. During periods of economic growth, this indicates that government employment grew less rapidly than did payroll employment.
The second significant feature is that starting in November of 2007, one month before our state's employment peak, government's employment share began rising, as it would through May of 2010, from a 13 percent to 13.8 percent of payroll employment. This reflects the fact that over this period, government employment was declining by less than did payroll employment. While this uptrend lasted for three years, government's share of payroll employment eventually began to decline once again as it now has for the past two years.
The final noteworthy element of this chart is that in spite of the decline in government's share over the past two years, government's share has remained above the levels consistent with its secular downtrend. This is reflected in the way the line for government's share has stayed above the dashed gold line reflecting the secular trend. So, while it might appear that a valid conclusion from the first chart is that Rhode Island's government employment may well have contracted enough, or perhaps too much, this is less obvious when viewed in the more proper context of government employment in the setting relative to overall employment.
To help better comprehend what underlies these charts, the next chart disaggregates the information contained in the second chart, looking at the shares of each of the three components of total government employment (click to enlarge).
Since 1990, state government employment's share has fallen noticeably, from 5 percent of payroll employment in the early 1990s to 3.5 percent at present. As this was occurring, federal government employment's share has remained virtually unchanged, starting at 2.4 percent in 1990 and falling only slightly to 2.2 percent at present. Clearly, local government employment's share rose from 6.6 percent in 1990 to its peak of 8 percent in March of 2006. At present, local government employment's share remains at 7.4 percent of payroll employment. That is highly significant, since local government employment is by far the largest component of total government employment in Rhode Island, exceeding the sum of the two other components. Within local government employment, local education employment comprises approximately two-thirds of its total.
Overall, as of May 2012, local education employment, the largest sub-component of total government employment in Rhode Island, was 22,800, or 2.8 percent of service-producing employment. While we might not be able to reduce that number very much through educational reform and other changes, the cost of financing K-12 education in this state is very high -- among the highest in the country on a per-pupil basis. Sadly, the "output" resulting from this very high expenditure is less than satisfactory. This points to relatively low productivity, if one were to relate attainment to expenditure. However, this is a very complicated issue. Suffice it to say for now that managing government here, as should be obvious from the situation for local educational employment and expenditure, is far more of a quality issue than one of just quantity.
Wednesday, June 20, 2012
Separating Fact from Fiction in Rhode Island's Labor Market Data
This is an article I wrote several weeks ago that the ProJo chose not to publish in its printed edition.
.......................
I've always admired weather forecasters. Whenever they want to know precisely what the current conditions are, all they have to do is look out the window. Things aren't quite that simple for economists. A great deal of the data we use is survey based. And, predictably, survey data are often revised, occasionally in ways that tell a very different story than what the originally released data showed.
.......................
I've always admired weather forecasters. Whenever they want to know precisely what the current conditions are, all they have to do is look out the window. Things aren't quite that simple for economists. A great deal of the data we use is survey based. And, predictably, survey data are often revised, occasionally in ways that tell a very different story than what the originally released data showed.
This is the case Rhode Island right now. After my March Current
Conditions Index report release, which showed that based on the existing data
Rhode Island was flirting with the double-dip recession, I was informed by the
Rhode Island Department of Labor and Training (DLT) that the likely upcoming
revisions to their data will tell a strikingly different story. Instead of
seven or eight months of consecutively declining employment, the upcoming data revisions
apparently show that employment actually rose throughout that time period. What
they did not say, but that is every bit as important, is that if employment has
actually been rising, a number of other key indicators will also be affected,
not the least of which is our state's unemployment rate.
Some of this was apparently discussed at the recent Revenue Estimating
Conference and reported by the local media. However, with the release of the
April labor market data, we only heard about the existing labor market data,
which we now know is faulty. Whenever anyone turned on their television or read
the local newspapers, they were told that Rhode Island's unemployment rate rose
to 11.2 percent as employment fell yet again.
What an extraordinary time! I honestly can't remember ever
being informed this close to the most recent rebenchmarking (data revisions) that
such dramatic changes were coming. This placed the local media in quite a
predicament, as they chose to report the April data as released by the DLT even
though, as I pointed out to a number of them, we shouldn't put very much confidence
in that data or the obvious conclusions that emerge from analyzing it.
So, at this point it is appropriate to quote the character Emily
Litella of Saturday Night Live fame concerning Rhode Island’s large number of
employment declines and the increase in our unemployment rate above 11 percent:
Never Mind!
The origin of the situation we now find ourselves in is the
result of cost cutting at the US Bureau of Labor Statistics (BLS). Soon, it
will be taking over the task of producing the monthly employment numbers that
was historically done by our DLT (this is also true for all other states).
While this may well lower costs, its greatest cost to the people of Rhode
Island will be the loss of all the experience and expertise of our DLT
possesses. Furthermore, the way the BLS will produce their estimated labor
market values will not incorporate as much known data as the DLT has in the
past. Instead of beginning projections after the third quarter of the prior
year, the BLS will start after the second quarter. Furthermore, and more
troubling, Rhode Island will apparently be homogenized. By this I mean that
exceptional circumstances or events that would routinely be analyzed and
meaningfully incorporated into the labor market data by our DLT will now often be
ignored by the BLS. As Rhode Island has an extremely idiosyncratic economy,
this homogenization will make our state’s labor market performance appear to be
very different from what it actually is at times. Ironically, the most obvious
impact of this homogenization will be to make Rhode Island appear to more closely
resemble overall US economy. If you don’t believe that, take one look at what
the BLS has done with their estimation of our state’s manufacturing wage (especially look at the charts after Read More ...)!
Because of these extraordinary circumstances, I found it
necessary to build a small econometric model of Rhode Island’s labor market in
order to estimate and simulate various labor market indicators. According to my
model, payroll employment has not been consecutively declining, as the existing
data show, but is in a mild uptrend. At the Revenue Estimating Conference, the
DLT offered tentative projections of where they believed payroll employment
might be as of March. My model produces slightly more optimistic numbers. As of
April, my estimate of payroll employment is slightly above 462,000, which is
higher than the official April value of around 458,000. Instead of having eight
consecutive employment declines in the last nine months, as indicated by the
current DLT data, my model shows consecutive increases for seven of the past
eight months, although not necessarily by large amounts. Along with this, my
estimate of the April unemployment rate shows it declining to 10.7 percent, not
rising to 11.2 percent. Even though my estimated jobless rate may appear to be
“better” than the DLT’s official value, its foundations are less than
flattering -- it is accompanied by declines in both our labor force and
resident employment.
The current divergences in labor market data are not the
fault of our state’s DLT, but the result of something forced upon them by the
federal government -- a different methodology. While I continue to have the
utmost faith in our state’s DLT, I am very irritated by the apparent attempt to
politicize our state’s jobless numbers by the DLT’s spokesperson, Laura Hart. She
recently offered an utterly ridiculous explanation as to why our state’s jobless
rate is so high -- Rhode Island doesn’t have the economies of scale that states
like Massachusetts have. If her hypothesis were correct, Delaware, another
small state, would have a very high jobless rate, while California, an
extremely large state, would have a very low jobless rate. For April, Delaware
had a 6.8 percent jobless rate while that for California was 10.9 percent.
It’s bad enough that the diverging data exists. Having DLT’s
spokesperson offer such ad hoc rationalizations only makes things worse.
Tuesday, June 12, 2012
Current Conditions Index Report: April 2012
This is an abbreviated version of my Current Conditions Index report for April (it excludes tables and The Bottom Line). I you want to read the full version, please go to my web site: http://www.llardaro.com .
Analyzing and forecasting an economy has
always been part science and part art. In light of the situation Rhode Island
currently finds itself in, based on the likelihood that the “official” labor
market data for this state is inaccurate, I guess you can add navigating
through fact versus fiction to the above list.
Since existing labor market data
are very likely understating two CCI indicators, Private Service Producing Employment and Employment
Service Jobs, and overstating one other, the Unemployment Rate, I will
now be providing two CCI estimates each month as the likely range for the CCI. This will
continue until the flawed data disappears, hopefully next February.
So, in spite of what you continue to hear
in this state, payroll employment has not fallen for eight consecutive months.
Nor is Rhode Island close to a double-dip recession. Interestingly, though,
with that many alleged consecutive drops in employment, why haven’t those
analysts who believe the currently released labor market data actually made the
recession call? I had avoided doing that prior to the revelation of the flawed
labor market data, since the Current Conditions Index failed then, as it
continues now, to show the requisite signal for a recession: six or more
consecutive values in the contraction range of below 50.
With all of this in mind, Rhode Island
entered the second quarter of 2012 on a positive note, as its re-acceleration
from the mid-2011 doldrums continued. In spite of the fact that Current
Conditions Index values based on the faulty existing labor market data (upper values) continue
to show readings barely above stall speed, allowing for likely data revisions,
the CCI has moved into the range of 67—75 throughout this entire year. This
should not be construed as indicating that this recent acceleration is
particularly rapid. Rhode Island continues to find itself in a sluggish
recovery. It is the persistence of these higher CCI values that matters the most for now. We have
moved above stall speed. As of April, Rhode Island’s recovery reached its 26th
month.
On a year-over-year basis, four of the five
non-survey-based CCI indicators improved. Only three of the five showed
improvement on a monthly basis, though — something for us to keep an eye on. Retail
Sales increased by 1.6 percent, its eighth consecutive improvement compared
to year-earlier values. Part of this is no doubt related to the skilled Rhode
Islanders we rent out to neighboring states who bring their income home with
them from states whose jobless rates we can only fantasize about here. Clearly,
though, Retail Sales momentum is continuing. Along with this, US
Consumer Sentiment rose as well, by 9.2 percent. For both of these indicators, April
values exceeded their March levels. New home construction, based on Single-Unit
Permits, continued its roller coaster ride, rising by 7.5 percent in April
relative to last year. It too rose relative to March. New Claims for
Unemployment Insurance, a leading labor market indicator that reflects layoffs,
declined by 8.8 percent, its fifth improvement in the last six months. Finally,
Benefit Exhaustions, reflective of longer-term
unemployment, failed to improve for the first time in almost a year.
Friday, June 1, 2012
A Crash Course in Making Sense of the Stock Market: Part 1
Today, the May labor market data for the US were released. The stock market tanked, continuing a strong downtrend that has persisted for a few weeks now. How can you make sense of what is happening now or what might occur in the future? First, let me recommend a very well written and readable book about following the stock market: Fire Your Stock Analyst (2nd ed.) by Harry Domash. I also have a link on my web page with numerous references about the the stock market: http://www.llardaro.com/references_for_exploring_stocks.htm .
To start with, let me outline an important principle about the stock market's performance:
Principle #1: Over the long term, the primary determinant of stock price movements is the expectation of future profits.
Of course, in the short-term, emotion and a host of other factors may dominate stock price movements. I don't recommend that you attempt to anticipate very short-term movements.
You are no doubt already aware of the fact that in a global economy, the performance of US corporations is not immune to events overseas, since many US corporations receive a substantial portion of their revenues and profits from overseas operations. Thus, the macro performances of Europe and Asia have a major bearing on what will likely happen to future US corporate profits. We know that Europe is now in a recession and Asian growth has slowed. Add to this a very disappointing US employment report for May, and there have been lots of negatives already factored into profit expectations, which have been much of the driving force behind the recent stock market declines.
The real question, though, is what will happen to growth and profit from here? This brings me to a second principle:
Principle #2: Because the expectation of future profits tends to be the driving force underlying stock market prices, stock price changes tend to occur before (lead) changes that will ultimately occur in the overall economy. Based on this, the stock market is called a leading economic indicator.
The recent decline in the stock market therefore indicates the expectation that the rate of growth of the US economy will slow further in the coming months. One should be careful not to make too much of this, however, since, as the old saying goes, "The stock market has predicted eleven of the last six recessions." Indeed, the stock market tends to do a better job of predicting upticks in economic activity than downturns. So, I do NOT recommend that you use the stock market's behavior as the basis for predicting if a recession is coming.
Since we now live in a truly global economy, to truly understand what is happening in the stock market, or what may occur in the future, it is necessary to look beyond stocks.
Principle #3: Different types of markets are linked (interrelated), so that clues for future changes in the stock market can often be gleaned by observing what is happening in those other markets. This is called intermarket analysis. You should follow at least the stock market, the bond market (for interest rates), and commodity prices. Currency markets also matter as well.
The stock, bond, and currency markets are all leading economic indicators. Commodity prices, however, tend to lag. I will focus on the bond market here.
Interest rates are determined in the bond market. Bonds, if you are not up on these, are debt obligations. The entity issuing the bond (ex: government, corporation, etc.) wishes to borrow money for some purpose. So they issue bonds, which in exchange for the money they receive from the bond investor, pay a fixed amount of nominal income over their term. There is a bond value, let's say $1,000, a stated interest rate, say 3%, and a term until the bond matures, lets assume 10 years. So, for when this bond is newly issued, you pay the $1,000. In return you receive a fixed income stream of $30 per year (the stated interest rate times the bond value = .03x$1,000) every year until the bond matures, then you receive the $1,000 back when the bond matures. Because bonds pay fixed amounts of income, these are called fixed income assets. Furthermore, the income is a nominal value. So, the greatest threat to bond holders is inflation, which lowers the real, or inflation-adjusted value, of the bond's fixed income.
Principle #4: Anything that raises actual or expected inflation makes bonds less attractive, since their fixed income then has a lower real (i.e., inflation adjusted) value.
As bonds are often sold before they mature (in secondary markets), higher expected inflation leads to some combination of lower bond demand (fewer buyers), and greater supply as some bondholders wish to unload their existing bonds. Both cause bond prices to fall in what is called a bond market sell-off.
The interesting thing concerns what causes expected inflation to rise. Generally, this is the expectation of more rapid economic growth.
Principle #5: Good economic news, which signals the likelihood of more rapid future growth, leads to higher expected inflation, which results in a bond market sell-off and lower bond prices.
Principle #51/2: Bad economic news, like the discouraging employment report today, signals the likelihood of slower future growth, which lowers expected future inflation, causing a bond market rally and higher bond prices.
These principles take a while to get used to: bonds tend to do well with bad economic news and the prospects for a weak economy. For this reason, bonds are referred to as a recession hedge.
Principle #6: When bad economic news occurs and expected growth falls (like today), the stock market sells off (due to lower expected future profits) while the bond market rallies (based on the expectation of higher real income from holding bonds). Money thus moves from stocks to bonds. This is called a flight to safety.
The stock market weakness over the past several weeks has therefore been a flight to safety. You are no doubt aware that the stock market has been declining. And, I will guess, you probably think there is no way to make money when the stock market is declining. WRONG!!! The bond market has been rallying.
Below is a chart of stock prices (the Dow-Jones Industrial Average) and bond prices (the 10-year US Government Bond Price) which illustrates what a flight to safety has looked like (click to enlarge).
Let me conclude by noting a principle I use all the time: which market changed direction first? Both stocks and bonds are leading economic indicators, but bonds have a longer lead time. In the next installment, I will discuss how to use changes in interest rates to help predict future stock price changes.
To start with, let me outline an important principle about the stock market's performance:
Principle #1: Over the long term, the primary determinant of stock price movements is the expectation of future profits.
Of course, in the short-term, emotion and a host of other factors may dominate stock price movements. I don't recommend that you attempt to anticipate very short-term movements.
You are no doubt already aware of the fact that in a global economy, the performance of US corporations is not immune to events overseas, since many US corporations receive a substantial portion of their revenues and profits from overseas operations. Thus, the macro performances of Europe and Asia have a major bearing on what will likely happen to future US corporate profits. We know that Europe is now in a recession and Asian growth has slowed. Add to this a very disappointing US employment report for May, and there have been lots of negatives already factored into profit expectations, which have been much of the driving force behind the recent stock market declines.
The real question, though, is what will happen to growth and profit from here? This brings me to a second principle:
Principle #2: Because the expectation of future profits tends to be the driving force underlying stock market prices, stock price changes tend to occur before (lead) changes that will ultimately occur in the overall economy. Based on this, the stock market is called a leading economic indicator.
The recent decline in the stock market therefore indicates the expectation that the rate of growth of the US economy will slow further in the coming months. One should be careful not to make too much of this, however, since, as the old saying goes, "The stock market has predicted eleven of the last six recessions." Indeed, the stock market tends to do a better job of predicting upticks in economic activity than downturns. So, I do NOT recommend that you use the stock market's behavior as the basis for predicting if a recession is coming.
Since we now live in a truly global economy, to truly understand what is happening in the stock market, or what may occur in the future, it is necessary to look beyond stocks.
Principle #3: Different types of markets are linked (interrelated), so that clues for future changes in the stock market can often be gleaned by observing what is happening in those other markets. This is called intermarket analysis. You should follow at least the stock market, the bond market (for interest rates), and commodity prices. Currency markets also matter as well.
The stock, bond, and currency markets are all leading economic indicators. Commodity prices, however, tend to lag. I will focus on the bond market here.
Interest rates are determined in the bond market. Bonds, if you are not up on these, are debt obligations. The entity issuing the bond (ex: government, corporation, etc.) wishes to borrow money for some purpose. So they issue bonds, which in exchange for the money they receive from the bond investor, pay a fixed amount of nominal income over their term. There is a bond value, let's say $1,000, a stated interest rate, say 3%, and a term until the bond matures, lets assume 10 years. So, for when this bond is newly issued, you pay the $1,000. In return you receive a fixed income stream of $30 per year (the stated interest rate times the bond value = .03x$1,000) every year until the bond matures, then you receive the $1,000 back when the bond matures. Because bonds pay fixed amounts of income, these are called fixed income assets. Furthermore, the income is a nominal value. So, the greatest threat to bond holders is inflation, which lowers the real, or inflation-adjusted value, of the bond's fixed income.
Principle #4: Anything that raises actual or expected inflation makes bonds less attractive, since their fixed income then has a lower real (i.e., inflation adjusted) value.
As bonds are often sold before they mature (in secondary markets), higher expected inflation leads to some combination of lower bond demand (fewer buyers), and greater supply as some bondholders wish to unload their existing bonds. Both cause bond prices to fall in what is called a bond market sell-off.
The interesting thing concerns what causes expected inflation to rise. Generally, this is the expectation of more rapid economic growth.
Principle #5: Good economic news, which signals the likelihood of more rapid future growth, leads to higher expected inflation, which results in a bond market sell-off and lower bond prices.
Principle #51/2: Bad economic news, like the discouraging employment report today, signals the likelihood of slower future growth, which lowers expected future inflation, causing a bond market rally and higher bond prices.
These principles take a while to get used to: bonds tend to do well with bad economic news and the prospects for a weak economy. For this reason, bonds are referred to as a recession hedge.
Principle #6: When bad economic news occurs and expected growth falls (like today), the stock market sells off (due to lower expected future profits) while the bond market rallies (based on the expectation of higher real income from holding bonds). Money thus moves from stocks to bonds. This is called a flight to safety.
The stock market weakness over the past several weeks has therefore been a flight to safety. You are no doubt aware that the stock market has been declining. And, I will guess, you probably think there is no way to make money when the stock market is declining. WRONG!!! The bond market has been rallying.
Below is a chart of stock prices (the Dow-Jones Industrial Average) and bond prices (the 10-year US Government Bond Price) which illustrates what a flight to safety has looked like (click to enlarge).
Let me conclude by noting a principle I use all the time: which market changed direction first? Both stocks and bonds are leading economic indicators, but bonds have a longer lead time. In the next installment, I will discuss how to use changes in interest rates to help predict future stock price changes.
Friday, May 18, 2012
Current Conditions Index Report: March 2012
This is an abbreviated report of the Current Conditions Index for March of 2012. If you are interested in reading the entire report with tables and The Bottom Line, please go to my web page: http://www.llardaro.com .
In my report last month, I noted that
based on the existing labor market data being released by the RI Department of
Labor and Training, “ … it is no longer clear whether the Rhode Island is still
in a recovery or whether it has moved into the earliest stages of a dreaded
double-dip recession. Payroll employment has now declined for seven
consecutive months on a year-over-year basis … For many, this alone
would be a sufficient basis upon which to make the recession call.”
After my report was released, I was
informed by the RI DLT that the current labor market data has been understating
job change, and that employment has been rising for some time now. So, remember
all the data they were and are still publishing and the conclusions anyone
serious about analyzing our state’s economy would arrive at based on them? To
quote Emily Litella of Saturday Night Live fame: “Never Mind.”
So, in an odd and circuitous way, my
overall conclusion last month that Rhode Island has not entered nor is about to
enter into a recession proved to be correct. And, in spite of what the data
published by the DLT now say, our state’s March Unemployment Rate is not
11.1 percent, but somewhat lower, likely in the 10-11 percent range.
All of this requires that I adapt CCI
values. Since existing labor market data are very likely understating
two CCI indicators, Private Service Producing Employment and Employment
Service Jobs, I will now be providing two CCI estimates each month
until the data flaws disappear (hopefully) next February.
Rhode Island ended the first quarter of
2012 on a positive note, as a re-acceleration from the mid-2011 doldrums
materialized. While Current Conditions Index values based on the faulty
existing labor market data continued to show readings barely above stall speed
(the top values), allowing for likely data revisions, the CCI beat or tied its
year-earlier values for every month in the first quarter (the lower values). As
of March, Rhode Island’s current recovery reached its 25th month.
On a year-over-year basis, four of the
five non-survey-based CCI indicators improved. All five showed improvement on a
monthly basis. Retail Sales increased by 4.4 percent, its seventh
consecutive improvement compared to year-earlier values. While part of this is
no doubt related to the skilled Rhode Islanders we rent out to neighboring
states who bring their income home with them, Retail Sales momentum
clearly does have “legs” at present. Along with this, US Consumer Sentiment
rose as well, by 13 percent. Both of these indicators had March values that
exceeded their February levels. New home construction, based on Single-Unit
Permits, continued its roller coaster ride, falling by 14 percent in March
relative to last year. But it too managed to improve relative to February. New
Claims for Unemployment Insurance, a leading labor market indicator that
reflects layoffs, declined by 7.1 percent, its fourth improvement in the last
five months. It too showed strength relative to February. Finally, Benefit
Exhaustions, reflective of longer-term unemployment, also fell, at a
double-digit rate.
Sunday, May 6, 2012
It Depends 2
In the last post I demonstrated that significant differences often emerge when values are adjusted for inflation. Even though all of our transactions are in terms of current dollars, meaning inflation is not explicitly taken into account, what matters most is real, or inflation adjusted values. This distinction is critical. As we saw earlier with respect to retail sales, and I will now demonstrate with labor income, even though current dollar values might indicate that things are going fairly well, when inflation is taken into account, a very different story emerges.
At the recent Revenue Estimating Conference, there was a good deal of discussion of something I discussed a few posts ago, that the labor market data will be revised higher than what the currently-published values show. That was and continues to be welcome news. The discussion then moved to labor income, which economist refer to as wage and salary disbursements (WSD). Clearly, this indicator has been doing fairly well recently and Rhode Island it has certainly moved beyond the lows it experienced at the depths of "The Great Recession." Should we interpret this as indicating that we have returned to where our economy needs to be, or that we have made a very substantial recovery up to this point? I'll let you judge for yourself. The chart below (click to enlarge) shows current dollar wage and salary disbursements for the US, New England, Massachusetts, Connecticut, and Rhode Island. All of these are expressed as a percentage of their value in the first quarter of 2005 (that is the value of 100).
If you've been following this blog, the pattern shown in the above chart should not be unexpected: Rhode Island's peak occurred at a value well below that of the other entities in the chart. And while the level of its WSD has been growing since its most recent trough in Q1 of 2009, it remains significantly lower than everyone else in the chart. The interesting feature is that Rhode Island's peak occurred at the same time as that for everyone else, in Q1 of 2008. Also, note that at present, wage and salary disbursements exceed that 2008 peak for everyone in the chart.
Since the first quarter of 2009, Rhode Island's wage and salary disbursements have clearly been growing. At present, they are in a very well-defined uptrend. Based on this, should we then conclude that the recovery here is proceeding nicely? To many people the answer is definitely yes. To make a meaningful judgment about this, however, it is necessary to delve deeper and to take inflation into account. In other words, it is necessary to examine the behavior of real wage and salary disbursements. The next chart (click to enlarge) shows this over the same time period.
In what should come as a surprise to almost nobody, when inflation is taken into account, things aren't quite as rosy. This is especially true for Rhode Island. And, let's be honest, Connecticut isn't doing that great either. For Rhode Island, while we have managed to move above our trough in Q1 of 2010, we have only been able to return as far as our most recent peak, in Q3 of 2010. Rhode Island is the only entity in the above chart that has failed to move above its value for that quarter.
Will Rhode Island move above that value? In order to see what is necessary for this to occur, I need to quickly review a relationship concerning real values:
Note from this that nominal growth (meaning current dollar growth) does not guarantee real growth. For real growth to occur, one hurdle must be surpassed. That hurdle is the rate of inflation. Therefore, if real wage and salary disbursements here are to break their most recent peak, it will be necessary for them to grow at a rate faster than inflation, which is currently around 2.0 to 2.5%.
Were the currently-released labor market data accurate, this might be fairly unlikely. Happily, the better-performing revised data make this highly likely. But even though our state's labor market is performing better than we had been led to believe, it's still not growing at rates resembling that in the rest of New England, the US, or southern New England, at least on a consistent basis. So, it's safe to say that while Rhode Island will break its recent peak in real WSD, it will continue to lag the levels attained by all of those entities.
At the recent Revenue Estimating Conference, there was a good deal of discussion of something I discussed a few posts ago, that the labor market data will be revised higher than what the currently-published values show. That was and continues to be welcome news. The discussion then moved to labor income, which economist refer to as wage and salary disbursements (WSD). Clearly, this indicator has been doing fairly well recently and Rhode Island it has certainly moved beyond the lows it experienced at the depths of "The Great Recession." Should we interpret this as indicating that we have returned to where our economy needs to be, or that we have made a very substantial recovery up to this point? I'll let you judge for yourself. The chart below (click to enlarge) shows current dollar wage and salary disbursements for the US, New England, Massachusetts, Connecticut, and Rhode Island. All of these are expressed as a percentage of their value in the first quarter of 2005 (that is the value of 100).
If you've been following this blog, the pattern shown in the above chart should not be unexpected: Rhode Island's peak occurred at a value well below that of the other entities in the chart. And while the level of its WSD has been growing since its most recent trough in Q1 of 2009, it remains significantly lower than everyone else in the chart. The interesting feature is that Rhode Island's peak occurred at the same time as that for everyone else, in Q1 of 2008. Also, note that at present, wage and salary disbursements exceed that 2008 peak for everyone in the chart.
Since the first quarter of 2009, Rhode Island's wage and salary disbursements have clearly been growing. At present, they are in a very well-defined uptrend. Based on this, should we then conclude that the recovery here is proceeding nicely? To many people the answer is definitely yes. To make a meaningful judgment about this, however, it is necessary to delve deeper and to take inflation into account. In other words, it is necessary to examine the behavior of real wage and salary disbursements. The next chart (click to enlarge) shows this over the same time period.
In what should come as a surprise to almost nobody, when inflation is taken into account, things aren't quite as rosy. This is especially true for Rhode Island. And, let's be honest, Connecticut isn't doing that great either. For Rhode Island, while we have managed to move above our trough in Q1 of 2010, we have only been able to return as far as our most recent peak, in Q3 of 2010. Rhode Island is the only entity in the above chart that has failed to move above its value for that quarter.
Will Rhode Island move above that value? In order to see what is necessary for this to occur, I need to quickly review a relationship concerning real values:
The percentage change in a real value (such as WSD)
equals (approximately)
the growth in its current-dollar value
minus
the rate of inflation
Note from this that nominal growth (meaning current dollar growth) does not guarantee real growth. For real growth to occur, one hurdle must be surpassed. That hurdle is the rate of inflation. Therefore, if real wage and salary disbursements here are to break their most recent peak, it will be necessary for them to grow at a rate faster than inflation, which is currently around 2.0 to 2.5%.
Were the currently-released labor market data accurate, this might be fairly unlikely. Happily, the better-performing revised data make this highly likely. But even though our state's labor market is performing better than we had been led to believe, it's still not growing at rates resembling that in the rest of New England, the US, or southern New England, at least on a consistent basis. So, it's safe to say that while Rhode Island will break its recent peak in real WSD, it will continue to lag the levels attained by all of those entities.
Subscribe to:
Posts (Atom)