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Clint Burdett - A Long View  

Forces Observations
Consumer Expenditures growth Trending down to slightly above historical trend line for year on year rate of growth, modest GDP growth remains below historical 3.1% per year business cycle growth.
Fixed Investment growth Private fixed investments improving. Private Residential Investments modest.
Debt per capita and household Personal debt bottoms, building again, particularly mortgage; Federal growing slightly
Job growth Moderate-steady job growth, slowing down: in core working 25-54 cohort hiring improves with more participating
Wage growth At 2.5% last quarter YoY fro Q4 2015, enough to have Fed raises discount rate again in 2017. (December reports indicate that "Average Hourly Earnings" for all private employees, nominal wage growth was at 2.9% YoY in December)
Inflation sufficient to spur wage growth PCE deflator is slowly rising towards FED target of 2%, CPI is at 2%, Fed likely to increase discount rate more often
Housing Sales growth (compared to other contributors to GDP) Household creation slow for 20s cohort. Normal market restored, housing prices growing moderately faster than CPI, home construction declines in Q2 and Q3.
Retail Sales growth Three month moving average sales growth continues
Uncertainty - Risk (more a short term horizon, more uncertainty) Trending to more cautious, shorter term, modest growth expectations
Expectation for 2018* USA Real GDP to grow about 2.4% in 2018 from 2017, consumer driven, stabilizing as world economies accelerate.

*In 2017 in real GDP grew 2.3% from 2016, in 2016 1.9% from 2015, in 2015, 2.4% from 2014, in 2014, 2.4% from 2013; in 2013, 2.2% from 2012.

Other trend estimates:

Consumer Spending and the Business Cycle


The Long View - Personal Consumption Expenditures

Conclusion: The Great Recession recovery consumer spending was modest in its rate of improvement, now just at trendline and with below par growth after the initial surge.

GR effects have faded.

The long view is a look over many years at economic drivers in the business cycle. I describe my analytical approach here.

Real PCE is a measure of purchases of goods and services by persons adjusted for inflation.

The Personal Consumption Expenditure (PCE) measure is the component statistic for consumption in GDP collected by the BEA. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. (Wikipedia)

This chart compares the percent rate of change from the same quarter last year.

Real PCE rate of change drops dramatically entering and during a recession and the recession recovery begins when the rate of change improves.

Coming out of the Great Recession (GR), the real PCE rate of change has been mostly below the linear trendline since 1950 until the spring of 2014. Thereafter the rate of change of real PCE compared to the previous period has moved above the linear trendline.

In traditional recoveries, the PCE rate of change accelerates early and stays there until late in the business cycle.


Real PCE, the Largest Component of Real Gross Domestic Product

Conclusion: Increasing, suggesting other contributors of GDP are declining (total = 100%)

From the mid-1950s, real PCE has increased to be the dominate component as a percentage of of real GDP.

There is a pattern before or at the onset of a recession where the real PCE percentage of real GDP increases dramatically as other components of real GDP decline relative to real PCE.

Other components - fixed residential investment, fixed non-residential investment, government investment - support those families. Finally, exports add to our national wealth and imports detract. The relative percentages vary during the business cycle.

See more on BEA Real PCE data

Contributers to Real GDP - 2014Click to see larger image

Contributors to Percent Change
in Real GDP by Quarter

Conclusion: The consumer is driving late business cycle growth.

From the BEA 1/26/18 release:

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, residential fixed investment, state and local government spending, and federal government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

The deceleration in real GDP growth in the fourth quarter reflected a downturn in private inventory investment that was partly offset by accelerations in PCE, exports, nonresidential fixed investment, state and local government spending, and federal government spending, and an upturn in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, turned up.

See BEA "National Income and Product Accounts Gross Domestic Product: Fourth Quarter and Annual 2017 (Advance Estimate)"

Note: Negative percentages in the chart reduce GDP.


New Durable Goods Orders

Durable Goods OrdersClick for larger image

Real PCE, Industrial Production and New Durable Goods Orders

Conclusion: Industrial production growth improving but not accelerating.

Industrial production includes products for consumers and products for consumers and for businesses (machinery, IT equipment, software, big ticket items like airplanes or ships).

Responding to demand businesses add or idle capacity, build up or sell off inventory.

Industrial Production magnitude of change to the same period last year, the swing from trough to peak, is greater than real PCE change. Since the late 1980s, that volatility has moderated as businesses have used "activity based management." These optimization techniques for production/inventory management are a macro trend in the global economy. (See my 2010 article "Where'd You Go Joe DiMaggio".)

A Rule of Thumb

Real PCE rising through 2.5 percent rate of change from the same period last year (more consumer demand), spurs production and falling through 2.5 percent causes a pull back in production with significant increases in unsold inventory, which often precedes a recession.

Prior to the GR, folks viewed about 3% real GDP growth per year as normal.

Conclusion: Durable goods orders growing.



Nominal Gross Domestic Product and the included Investments

Conclusion: Total private fixed investment modest growth from residential investment.

Since real PCE is time late to determine the inflation component, I'll use nominal data (inflation is not removed) for the first release of data to compare apples to apples. If it is real data, I will be explicit, i.e. "real GDP", otherwise it is nominal data.

From total nominal GDP we see two investment components, gross government investment (green) and total private fixed investment (purple).

Within total private fixed investments we see residential fixed investments (red).

(Note the investment components of GDP are not stacked to show the relative contributions.)

Though total private fixed investment is increasing, private residential fixed investment has declined from before the onset of the Great Recession and is slowly recovering.

The media discusses government spending and the housing industry as the drivers of growth. I was surprised to learn that these sectors contribution to GDP are similar and more modest than represented in the press.

Gross Government Investment

Conclusion: Government investment decreased during the 2016 election season.

Gross Government Investment rate of change from the same period the previous year increases more dramatically than total Industrial Production but does not cut back as much. Government includes Federal, State and local entities.

Note the high rate of investment from the mid 1970s to the mid 1980s.

Compared to Industrial Production, the peaks are higher, the toughs shallower. The later peaks must reflect the slower political decision process.

The troughs lag real PCE troughs in rate of change. People begin to spend more (increasing demand) while Government is still cutting back (rate of change to same period last year < 0).

There is an election season effect where gross government spending declines.

Since the Great Recession, government investment has not contributed to the recovery.

Federal Government
Real Consumption Expenditures and Investment
7 Years after Onset of 81-82 and 07-09 Recessions


Government Investments That Directly Benefits You

Conclusion: As a society, we are decreasing our shared investment and services per person through government activity.

Since the data was first collected in the 1950s, the government's investment and consumption per capita as a percentage of GDP have decreased. As GDP grows, we reinvest less and less per capita in our society.

From the BEA:

Government consumption expenditures and gross investment measures the portion of gross domestic product (GDP), or final expenditures, that is accounted for by the government sector.

Government consumption expenditures consists of spending by government to produce and provide services to the public, such as public school education.

Gross investment consists of spending by government for fixed assets that directly benefit the public, such as highway construction, or that assist government agencies in their production activities, such as purchases of military hardware.

Per Capita Trends - Debt


GDP, PCE and Federal Debt Per Capita

Conclusions: The USA, a mature economy, per capita has returned to its historic growth rates for GDP and PCE and with low interest rates on federal borrowing, the percent of interest payments to federal debt has declined. Federal borrowing is sustainable in the mid-term.

Per capita is another way to examine change over time, a ratio of aggregate data per person.

Nominal GDP and personal consumption expenditures per capita have been increasing steadily and have returned to traditional rates of growth (slope of the lines).

Federal debt per capita since the inception of the Great Recession has increased significantly, the core of our political debate today.

Interest as a percentage of federal debt per capita has declined due to lower interest rates and barring our lenders forcing rates up, is sustainable.

Many are concerned that the Federal Debt to GDP ratio at about 105% is too large, unsustainable.

The better question is can the USA grow its GDP to where the Federal Debt/GDP ratio declines as it did in the 1960s and 1990s?

Federal Debt as a percentage has leveled off.

Federal Debt Percentage of GDP

5/23/14 Geithner Interview by Sir Harold Evans

Household Debt
Consumer Credit Dollars per Capita

Conclusion: Non-revolving debt (car and students loans) are increasing.

My view is the Great Recession was caused by a credit bubble in the Housing Sector where the financial sector trading mortgage backed securities, with many borrowers unable to make payments, experienced a liquidity run (nearly causing a panic). The run shattered our sense of well being and the economy contracted.

We see that from the mid-1970s per capita, as a society we took on more debt and began correcting from the credit bubble bursting in 2008.

To maintain lifestyle, a household uses either wages, interest, capital gains, savings or debt.

The sustainable component is average hourly earnings compensation. Interest, capital gains and savings are a result of how we manage that compensation.


Household Debt Ratios

Conclusion: U.S. households are reducing long term debt after the credit bubble burst. Short term debt increasing.

Households know we have too much debt.

We see a substantial reduction in household debt service ratio as a percentage of disposable income, a continuing reduction in mortgage debt component and the consumer (credit cards, cars) component now increasing a bit.

(Note the components are not stacked to show relative contribution. Household DSR = Mortgage DSR plus Consumer DSR)

The mortgage delinquency rate is coming down and is well below 2000s run up to credit burst.

Delinquency Rates





Conclusion: Businesses are hiring, the rate of change at 1.5% to the same period last year has declined from peak in January of 2.3% trending down.

Jobs (compensation), interest, capital gains and debt sustain lifestyle and fuel economic growth.

After the end of the Dot Com Recession and the Great Recession, job creation seen in the percentage change from same period last year did not accelerate like in prior recoveries. (The green line from passing through 0% right axis to peak.)









12/7 from Calculated Risk (left chart):

Jobs openings decreased in October to 5.534 million from 5.631 million in September. Job openings are mostly moving sideways at a high level.

The number of job openings (yellow) are up 2% year-over-year.

Quits are up 7% year-over-year. These are voluntary separations. ... The economy is still adding jobs

Read more at Calculated Risk

Fed Labor Market Conditions Index

ISM Manufacturing and Service Index EmploymentClick to see larger image

But job growth is showing signs of slowing down.

Long View - Hiring Lags Spending

Conclusion: Today, the rate of job creation, the green line, is trending down.

Real PCE growth rate changes in the business cycle leads Civilian Employment growth rate changes.

Civilian Employment troughs usually lag PCE troughs and Civilian Employment peaks lag the first PCE peak in a recovery. In other works, people begin to spend more as they recognize the end of the recession and then employment picks up. As employment picks up, spending picks up.

Since 2015, hiring has not picked up following and peak in PCE spending.

As seen earlier, the green-dashed linear trend line for Civilian Employment has a slight down slope.

Over time, we create fewer jobs in recoveries and before the 1990s, the bulk of the jobs created had usually come early in the recovery.

Long View: Employment to Capacity Utilization

Conclusion: Good news on hiring is tempered by a long term trend that the percentage of population employed is not increasing compared to recoveries prior to 2000 and our total capacity is trending down.

This chart compares percentage of the population employed, which has fewer "adjustments" in how the numbers are compiled than new jobs reported in the press and supports my observations in the last chart that job creation is trending down.

Total industrial capacity utilization has not not recover from the last recession since the 1970s and the peaks are declining.

From the St Louis FRED description of TCU:

" ... Total Industry (TCU) is the percentage of resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States (excluding those in U.S. territories). . . . We can also think of capacity utilization as how much capacity is being used from the total available capacity to produce demanded finished products." 

The rebound in percentage of the population employed since 2000 after a recession is not as dramatic.

25-54 Years Old Cohort - Percentage Employed of US Population, Participation Rate, Unemployment Rate quarterlyClick to see larger image

Participation Rate 25-54 Year Olds (prime working years cohort)

Conclusion: More 25-54 year olds are working in this core age group as baby boomers age out, and in November with wage growth at 2.9%.

The participation rate is the percentage of the cohort in the labor force, here 25-54 year olds working or seeking work. (see BLS glossary)

The employment-population ratio is those working within the cohort's population.

The unemployment rate is those not working within the labor force.

(Participation Rate - Employment/Population Ratio)

There will be less economic "spur" in the core working years; fewer of 25 to early 30s are in the labor force with high disposable income. Many marry later.

The Economist: The Population Pyramid

This long term population change presentation is a must see. The changes it describes will effect us all.


Labor Force Participation Rate USA

Conclusion: As the baby boomers continue to age, the total population participation rate will continue to decline until the remainder of Millennials enter the 25-54 years old labor force in the 2020s.

Those not in the labor force spend less; those early in life joining the labor force spend less.

The Atlanta FED's Center for Human Capital Studies provides a monthly updates on labor trends.

Manufacturing & Service Employees and Jobs per Capita

Conclusion: More folks working but with less income growth.

I had expected jobs per capita to decline slightly as hiring slows (dotted line) and see that most job growth is in service industries (red line steady growth), where pay and benefits are less than in manufacturing (blue line declining).

Two cohorts Gen-X in 2028 and Millennials in 2015 were larger generations than the Baby Boomers.

In December 2016, jobs per capita has not started to trend down. That is great news.

Second, the media assumption real disposable income per capita is declining is incorrect. It continues to grow..

Real Disposable Personal Income: Per Capita

Producer Price Index

Rather the rate of growth real disposable income from the same period last year is slowing (left chart).

Average Hourly Earnings Earnings


Increases in PCE Lead to Jobs Lead to Better Wages

Conclusion: Real Average hourly earnings growing a 2.5% year on year, trending flat (BLS calculation). The Atlanta Fed Median Wage Growth Tracker has accelerate to a 3.5% three month moving average.

Jobs created multiplied times average hourly earnings is a significant contributor to the growth rate of Personal Consumption Expenditures.

Then as the unemployment rate drops, there are competitive pressures to offer better wages for new hires. Restated the steps are:

Improving PCE -> more hiring -> wages improve

(The chart uses my Real PCE 2.5% rule of thumb.)


Government Action to Increase Income Growth

Conclusion: Income growth has been declining since the early 1980s regardless of Federal efforts to spur it.

Using nominal PCE percentage change to the same period last year, grow in Nominal PCE and Average Hourly Earnings rate of change to the same quarter last year has been declining for decades. Can government reverse that?

Employee pay is subject to many complex influences and timing, and we are globally integrated.

Many politicians have advocated that tax cuts (supply side) or raising the minimum wage (demand side) have an immediate impact on disposable income. They assume that the average consumer will continue to spend that extra dollar or that someone's wealth will increase, they will invest in capital improvements and it will trickle down. There is little evidence in this chart that these political philosophies sustained growth in nominal PCE and wages. Rather the results are short term

In 2016 many local governments have a $15 minimum wage. Most implementation is voluntary.

I think is is our competitiveness, how we position and adapt our businesses, that drives long term income growth, not solely party agenda.



Inflation - The Public Perceptions

Conclusion: Core PCE inflation is rising towards 2%, CPI is at 2%. Fed likely to raise rates more often.

Reasonably, as employment improves (slack reduced), wages pressures will begin as owners compete for new hires.

The risk of inflation influences our perception of well being. In the American psyche, "hard work" should mean better pay as prices go up.

In the 20th Century, hyper inflation in Germany in the 1920s and high inflation In the USA in the 1970s with stagnant growth were judged serious threats to society's well being. These memories influence policy discussions today.

The Federal Reserve Board seeks to find the "right" level of inflation for price stability; currently it is 2% using nominal PCE compared to the same period last year.

In this widely quoted data, inflation is represented by the change in a PCE index from the same period last year. So if the index increased 1.3% from the same period last year, for that period inflation was 1.3%.

The media quote either the Consumer Price Index (CPI ) for prices or the PCE Core Index less Food and Energy for consumer expenditures. (See BEA FAQs for wonkish explanation of differences.)

PCE indexes are normalized with 2009 = 100. PCE Chain-type Indexes use a moving average approach (survey the consumer, how much of what did you buy for what price this period compared to the last period).

CPI measurement uses weighted values fixed for several years (go to the grocery store, check the price changes for the same items).

I have no idea which is the better measure. Read more and compare PCE to CPI headline inflation over time.

To be consistent with my other charts, I'll stick with PCE analyses.


Core Inflation and Wage Pressures

Conclusion: Pressure for increased wages increased from late 2015. Producers, on the other hand, saw minimal increases in prices they pay.

Early in my working years, I like so many others pushed for wage increases to offset inflation.

Using three month moving average annualized the chart shows PCE change (when positive, increases demand) is less volatile than pressure to change earnings, and since 1980s, this pressure on wages has "moderated," less swing trough to peak.

The magnitude of change YoY for average hourly earnings (swing trough to peak) is now increasing, still modest. There is more push for wage increases.

The year on year rate of change for the Producer Price Index for all commodities is declining.

Produce Price Index

Producer Price Index




Long View - Housing Investment (the Engine of GDP Growth) Compared to Total Fixed Investment

Conclusion: Residential construction is modestly increasing (red line) late in the recovery.

Residential and nonresidential construction are the traditional drivers for a recovery and contributors to GDP growth.

Earlier I showed that real PCE contributes about 68% of real GDP. In most recoveries, new home purchases increase coming out of the recession (their construction adds to GDP) and all the stuff needed in a new home increases demand for these products. Existing home sales just add the broker's commission to GDP.

(Note the components of Total Fixed Private Investment are not stacked to show relative performance.)

Household Formation

Conclusion: 20 somethings will be slow buying starter homes.

From the NY Fed Liberty Street Economics 2/4/2015:

Our findings, then, confirm the view, widely reported in the American media, that today’s young people are more likely to live in parental households long into their twenties than were young people one or two decades ago. This trend is widespread across the United States. Finally, while local economic growth, reflected in rising youth employment and escalating house prices, has mixed consequences for youth independence, the increasing magnitude of student debt among college graduates appears to be driving young people home and keeping them there.

Homeownership and
Apartment Vacancies Rates

Common sense tells us homeownership falling, apartment vacancies fall as people rent a place to live.

As the Homeownership Rate declines from a peak of 69.4% in Q2 2004, apartment vacancies lagged and declined from a peak of 11.1% in Q3 2009. Much of the increase in fixed residential investment as a percent of GDP has been multi-unit construction.

(Note the left and right scales are not the same range.)

Housing Sales

Conclusion: As normal market restored, new home sales are not accelerating and existing home turnover is modest.

The output of housing investment is either new home sales or an increase in inventory (see next topic).

New home sales slope (rate of change) usually parallel existing home sales but there is still an overhang from foreclosures, so demand for new homes is improving at a slower rate (less slope).

The last peak in existing home sales marks the beginning of the end of foreclosures sales that have held prices down.

The US Homeowner Vacancy Rate has been declining but is still above its historical trend.

US Homeowner Vacancy Rate

US Homeowner Vacancy RateClick to see larger image

New Homes Inventory - Months of Supply and my opinion

Conclusions: New home builders' inventory is normal, about 6 months of supply. Housing starts edging up, but permits leveling off.

(Note months of inventory red line right scale is inverted.)

House Prices Change Relative to Consumer Price Index

Conclusion: House prices edging up modestly compared to CPI.

The expectation of increased earnings coming more slowly I discussed earlier and the modest rise in home prices will retard the pace of growth of new home starts.

Home prices are increasing relative to the Consumer Price Index as we saw during the early 2000s (S&P Case Shiller 10 City Index divided by the Consumer Price Index).

New household creation (first time buyers) will eventually restore the housing market, there will be pent up demand, but these households need confidence in their ability to pay.


Retail Sales


Click "Customize" to go the St Louis FED FRED

Retail Sales and Food Services Sales Month to Month.

Percent change from previous month for the last 10 years.

Retail sales growth is more frequent and decline rates month on month are unusually modest.

Retail Sales Ex Gasoline SmoothedClick to see larger image

Retail and Food Service Sales ex Gasoline compared to Nominal PCE

Conclusion: Retail and Food Service sales rate of growth are improving.

(Note I use a trailing 3 month average for retail sales, not adjusted for inflation.)

Sales are volatile month to month so I use a three month trailing average to reduce "noise" in the data.

There is not a surge of consumer spending (PCE) suggesting sales will not surge into the next quarters.

Early Warning - Yield Spreads Mark a Change in Expectations


2 - 10 Yield Spread

Conclusion: The 2-10 Constant Maturity Treasury yield spread is not signalling the economy is heating up, rather "the right side of the cup" is building slowly.

Coffee cup patternAt university, I was taught that bond investors, a conservative lot, best anticipated future growth and to look for the "coffee cup - a handle on one side, the cup bottom and then the rim on the other" where after a recession (the cups handle), PCE peaks as spending returns (one side), settles down (the bottom) and then peaks again (the other side) before onset of the next recession. People often say as the other side appears, the economy is "heating up," growing too fast, and short term bond yields rise.

If the economy is not heating up longer term yields can come down to attract buyers. Quantitative Easing by the FED was designed to pull long term yields down to stimulate investment.

I look at 2 year constant maturity treasuries yield minus 10 year constant maturity treasuries yields, a spread often quoted in the media, to discuss growth patterns.

The" heating up" pattern is not evident now.

(Note many report the 10-2 spread, where the chart would be inverted applying the same logic. I use the 2-10 to better show the lead-lag relationship to PCE.)


Constant Maturity Treasury 2,5,10 and 30 Year Yields and 2-10 and 5-30 CMT yield spreads

Conclusion: Since late 2013, investors focus is trending more short term.

In the previous chart, I discussed the 2-10 spread as a often quoted as a leading indicator of a recession. The 5-30 spread can also be used, here focusing on long term expectations.

A rule of thumb is a -200 basis point spread (1 basis point is 1/100 of a percent) is a shift in approach point, > -200 basis points expectations are cautious, < -200 bps expectations are for growth.

Again very modest growth expectations as the 5-30 spread narrowed faster than the 2-10 since late 2013.

Age old advice: the bond market has predicted 5 of the last 10 recessions.

Bernanke 3/2013 Long-Term Interest Rates

The fact that market yields currently incorporate an expectation of very low short-term real interest rates over the next 10 years suggests that market participants anticipate persistently slow growth and, consequently, low real returns to investment. In other words, the low level of expected real short rates may reflect not only investor expectations for a slow cyclical recovery but also some downgrading of longer-term growth prospects.

The observations on this page are not guaranteed
nor should the information be used for investment advice or decisions.

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