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Where The Economy Stands For 2018

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Where The Economy Stands For 2018

The market has certainly gotten a bit rocky.  They say November is historically a strong month for the markets.  That’s mostly because funds are cleaning up their positions and taking new positions.  That buying tends to be bullish.

I track labor metrics to understand the breadth and depth of the economy.  More hiring by more companies means solid economic growth.

There’s a chart I put together which expresses the relationship between Jobless Claims and US GDP.

First, let me explain the concept – because I created it and it’s not widely known.

The premise is basic – companies hire and fire based on their business activity compared to the prior year.  If Acme did $1 million (M) in business last year and they expect to do $1.1M this year, then they hire more.

Next, I take that year-over-year (yr/yr) measurement in Initial Jobless Claims.

When this year’s claims are below last year’s then the economy is expanding. Turned around, when companies are firing fewer workers, it’s because they have more business.

But there’s a threshold level. Historically, when that yr/yr gap is >5%, the economy is growing.

Once that gap shrinks to <5%, economic growth is about to flatten. When that gap disappears altogether and more people are being fired this year versus last year, then growth is contracting.

Now, that’s a rule of thumb. And there are some nuances. But the chart is very revealing.

The most important nuance to take note of is breadth: how many States are in the 5% zone.

For example, a hurricane can push up claims and make that headline Jobless Claims figure a problem.

So I measure how many States have a y/y claims level that is >5%.

And this is what I see:

Look at the run-up to the recession in 2007.  The tipping point came in late 2016 when we started to see that the minority of States continued to have Jobless Claims below the prior year (technically at least 5% below the prior year).

In Q1 2017, that figure crashed. Barely 1/3 of US states were below the prior year. Put differently, by Q1 2017, a clear majority of US States had a rising number of Jobless Claims compared to the prior year – and that meant State-level recessions were underway.

The line in the chart reflects the GDP – which confirms the signal strength behind this Jobless Claims metric.

Now look at 2015-16.  The US was heading towards a recession.

Post-election, the signal has reversed.  And it’s even better in Q4 2017.

We have broad strength now.

I remain a bit concerned as we head into Q1 2018. Claims are ~240K and, frankly, that’s where they were in 2017.

In other words, in a few months, we will see no gap between this year’s claims and last year’s. And that’s a signal for a recession.

And while a tax cut is promising, note that Obamacare sits at the heart of the proposals.

Any hit to Obamacare is recessionary – much of the last three year’s of growth has come from Federal government healthcare subsidies.

Never mind the accounting and financial engineering that turns government debt into GDP. The real issue is more basic: take away those subsidies, and the healthcare industry will layoff workers.

Key Takeaway: We have broad strength in the economy now as indicated by the chart laid out above that overlays GDP vs Jobless Claims. However, there’s a concern heading into 2018. For now… things are okay.

Andrew Zatlin

Editor of Moneyball Economics

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Vice Index: A Rebound Is Coming

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Quick Note: Hurricane recovery efforts continue to distort the picture.  Recovery efforts mean a lot of spending on building materials as well as replacing cars and furniture.

Vice Index Data: Downshift Is Reversing

  • Vice Index points to some acceleration
  • Households digging into savings

          (Note: The Vice Index is lagged 5 months)

Retail data is positive mostly thanks to short-term hurricane supply-chain disruptions.

First up was fear and stock-piling. Businesses were afraid of supply-shortages so they paid extra to ensure no disruptions occurred.

  • Wages rose
  • Overall spending rose on re-building/recovery efforts, but savings were hit
  • Discretionary spending took a hit

Wage Growth Up – But Already Reversing 

Among other things, truckers and construction workers were in big demand post-hurricane.

But that demand was short-lived. As recent payroll data shows, the wage spikes in September largely reversed in October. But not all completely reversed.  

The supply-chain disruption reversed in full (for example, wholesale wages). Construction wages remain elevated: the rebuilding efforts on top of ongoing home construction demand continues to boost wages.

The implication is that October compensation growth will be slightly above trend.

Compensation turned up while the hurricane was underway. 

But October earnings data shows the hurricane was underway…. sharp reversal

Hurricane’s Extra Spending Crowds Out Other Finances

The extra spending comes at a cost: it’s squeezing out spending on other sectors and denting savings.

Spending on dining out was already slowing. It’s slowed even more. It’s a prime example of households under pressure as spending gets squeezed out. (Hurricanes likely boosted dining out – the thousands of people displaced were unable to cook their food and had to rely on restaurants.)

Another sign of households under pressure is the drop in the savings rate.

(The following chart averages the rates of gambling growth for Detroit, Maryland, Connecticut, Atlantic City, &  Pennsylvania.)

Gambling is still struggling…

Last year September, Hurricane Hermione was bearing down and the weather kept people indoors.  This year the weather has been much more mild and so gamblers were out and about. Especially in Atlantic City (which lost a lot of revenue to the hurricane last year because it came around Labor Day weekend.)

It almost exactly mirrors the Food Service spending trajectory and the trend is the same: Americans are slowing their fun-money spending.

Escort Pricing

Escort prices: Future expectation is expected to be limited

Starting in Q4 2017, escort prices rose an average of $50 an hour. But they stopped rising by Summer time.  

In terms of inflation expectations, it suggests that households expected inflation to rise in 2017 BUT they are not expecting much inflation in 2018.

First, understand that escort prices reflect inflation in at least two ways:

  • Current inflation:  Hotels are the biggest cost driver for escorts, followed by beauty supplies.
  • Forward inflation: supply & demand factors drive prices up or down.  In an expanding economy, it’s the classic case of more money chasing a limited amount of goods.

Inflation has cooled…

Hotel price inflation was strong in 2016 but cooled in 2017.  (It could be tied to Aribnb, which competes with hotels.)  The 10%+ increase in 2016 hotel prices contributed to escort price hikes.

And 2017’s slowdown in hotel price inflation relieves pressure to raise rates any further.

Demand remains strong too…

The key consideration in any escort pricing discussion is affordability.  Assume that the supply of escorts has stayed relatively constant.  For prices to go up without a drop in demand points to available discretionary funds.

An interesting data point is that, in response to the price hikes, customer pushback was minimal.

That is, on the chat boards on the various websites that cater to the escort industry, complaints about price hikes were immediate but receded fairly quickly.

That speaks to customer expectations about inflation: back in 4Q16/1Q17, escort’s customers accepted inflation.  (They didn’t like it, but they understood and accepted it, as evidenced by (1) limited complaints and (2) no reduction in purchase activity.)

The lack of price hikes signals lower expectations of future inflation.


Andrew Zatlin

Editor of Moneyball Economics

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What The Moneyball Vice Index REALLY Says About Retail Forecast!

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Total Retail Spend Grows On Hurricane-Linked Demand

First, I want to point out that the two hurricanes that have devastated Texas, Florida, and Puerto Rico have been horrible.

Hundreds of thousands, if not millions of peoples’ lives were affected. And their circumstances have changed dramatically over these past couple months.

BUT… these hurricanes were a positive for economists looking for a boost in spending.

These hurricanes disrupted routine spending… but boosted spending on autos (car/truck replacement), building materials (home repair) and gas prices (prices surged).

Vice Index Now Points To Lower Spending

Recent downward revisions to retail data confirms that the Vice Index correctly predicted a pullback in spending growth.  

  • Trend: The latest data points to a near-term bottom in the 4Q.
  • September: August Retail (ex-Autos/Gas) spending came in at 3.3% y/y.  Further erosion means September will dip to 3.1%

Wage Growth Levels Off On Improved Comps

The collapse in 2H 2016 compensation growth will boost growth rates through 2017.

A similar pattern is visible in the Vice Index chart above.

Accompanying the slide in compensation growth is a similar slowdown in the savings rate.

It’s getting harder to squeeze more spending from the consumer. Their savings are down. They don’t have as much money to spend leisurely as they used to.

National Retail Federation Predicts Holiday Spending Growth

Per the NRF, a trick of the calendar will pull in spending and prevent the spending rate from falling below last year’s.  

Weekend days are always a bigger shopping day, regardless of the season. And this year the holiday period gets to include an extra one. Otherwise the spending rate would fall below last year’s.

That’s part of the softness is being echoed in the Vice Index data. The other part is that the NRF notes the weakness in the lower income segment. No doubt the strong stock market and continued job market strength will underpin middle and upper income spending.  But will it be enough to offset the broader weakness?

Vice Index says no.

Gambling Outlook – Still On A Losing Streak

Middle America is under financial stress.

Over the past year, US casinos (ex-Vegas) have enjoyed only 1 month of positive growth.

Las Vegas is doing a bit better thanks to the return of Chinese gamblers: YTD gaming revenues are up 3.5%.

This reflects the bifurcated US economy: middle America is pulling back on frivolous activities while upper income consumers continue to spend.

(NOTE: Will higher spending by the 1% be enough to offset a spending pullback by the bottom 99%? We’ll have to find out…)

Is Cannabis Replacing Beer?

Beer consumption fell in 2016 for the first time since 2011 (per IWSR).

Several reasons are possible:

  • Changes in drinking habits:  Millenials are socializing differently: it’s popular to hang out at home with friends and “Netflix and chill.”  And that’s driving a shift: drinking at bars (on-premise) has dropped while drinking at home (off-premise) has grown.
  • Shifts in taste: Beer is down, but distilled alcohol is up.  That’s largely from new styles of tequila and bourbons being released, and the big marketing campaigns pushing them.

But maybe cannabis legalization is also playing a role.

Go back to the Netflix-and-chill socialization.  That’s very pot friendly too.

A survey in March 2017 by Cannabiz found that 27% of beer drinkers would switch to cannabis when/if it was legal.  

In 2016 Cowen & Company noted that beer consumption dropped the most in precisely the States where pot was legalized: Oregon, Washington, and Colorado. Denver saw a 6% drop in beer consumption.

KEY TAKEAWAY: Major bellwether industries for the retail consumer are showing signs of distress. The upcoming holiday season will help… but most consumers are already maxed out. They can’t NOT buy their friends and family holiday presents. After that… who knows when they’ll make those big purchases again.


Andrew Zatlin

Editor of Moneyball Economics

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The One Chart You Need To Look At As The Markets Hit New Highs

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The One Chart You Must Follow

Don’t read too much into current stock market moves…until you use one simple measurement to gauge stock market valuations.

But first, remember that we just finished the third quarter. This really isn’t much news to provide direction.

There is also a lot of chatter that the market is overbought – and it is.

But, the basic premise is that fundamentals matter.  

That is why I believe that Jobless Claims are the best means of measuring the underlying economic growth.

What I do is take the jobless claims y/y and then invert it.  Inverting is key: the stock market going up is a positive, Jobless Claims going up is a negative.  Inverting the Jobless Claims makes the moves correlate.

You’ll see the stock market and jobless claims (inverted) are positively correlated.

Jobless claims growth do a fine job of confirming the market’s growth. We don’t want them to match perfectly – because the reality is that the market gets overbought or oversold. So this signal will never be exact.

Instead, we want to spot when the market is overbought or oversold and move accordingly.  Because the market always reverts to the level indicated by the Jobless Claims signal.

In other words, after a quantitative easing (QE) boost or a panic (a la North Korea), the market wakes up and moves to the level that makes sense based on the underlying economic growth.

To put it simply – the market is hugely rational over time, but can be hysterical in the near-term. Jobless claims is a significant indicator in where the market is going.


Andrew Zatlin

Editor of Moneyball Economics

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Are We At An Inflection Point In The Economy? Yes!

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The End Of Effective Stimulus

(I’m looking at the macro fundamentals and I think an inflection is coming up in a few months…and that means opportunity.)

At the highest level, global growth is coming from a few places

  • China stimulus: backstopping materials prices and also juicing up Asia/E.U. activity.
  • E.U. stimulus: propping up activity via negative rates and public spending to integrate migrants (now running ~$80 billion annually).
  • Favorable Comps: The first half 2016 (H1) was terrible, so H1 2017 has been fantastic

The stimulus is losing effectiveness: nominal levels of goods consumption remains stuck at 2015 levels.  And capacity just keeps growing.

Meanwhile, the current growth waves are set to slow in the next 4 months.

China Is Already Slowing

Money supply is critical to keeping China’s domestic economy afloat.  It’s underpinning domestic demand:

Simply looking at M1 supply above, you can see the slowdown coming to China.

Everything is already slumping (OK – most countries would still kill for 6%+ Industrial production growth. But this is a slump compared to the 10%+ they had just a couple years ago).

And if China wants a “soft landing” (being able to transition their economy to consumer-oriented like the U.S.), then the current slow growth trajectory will continue.

E.U. Is Starting To Catch China’s Cold 

China’s slower growth is bad news for EU, which relies on China’s private sector demand.

E.U. consumer goods are very popular in China. As is machinery and materials.

For a sign of what’s to come, Germany’s most recent Factory Orders Exports didn’t grow at all (came in at 0% growth). Accelerating this trend will be the new German auto factories coming online in China.

Masking this decline is E.U. migrant integration stimulus.

Domestic consumption is surging, which it should given the ~$80 billion (B) earmarked in 2017 public spending. Germany alone has budgeted $55B.

That’s a lot of housing, food, and healthcare spending.  ut the pace of those capital injections begins to taper off in 2018.

Already, the signs of peak are evident.

The Moneyball E.U. Shipping Index shows that peak growth already came.  (As a reminder, this data measures a specific set of cargo shipments of high-value, intermediate goods).

To put this into context, the volume of cargo passing in and out of the Port of Hamburg is stuck at 2012 levels. The growth we see in the E.U. is better than 2015, but still weak.

The current trajectory in trade suggests continued growth through the rest of this year.

But expect problems to emerge in Q1 2018 because growth waves are tapering at the same time (China demand, migrant stimulus, and favorable comps).  And this is before any possible tightening from the European Central Bank.

The U.S. Is Also Set To Slow Down In The Coming Months

How mediocre is U.S. growth?

It’s been barely cranking out 2% GDP despite 0% interest rates for 9 years. And even today where we have <2% inflation. And this year – H1 2017  -enjoyed some now-fading drivers

  • Favorable comps:  Q4’15 and Q1’16 GDP were ~0.5%, so any year-over-year (yr/yr) comparison looks fabulous. But H2 2016 was a lot stronger.
  • Catch-up spending: a lot of H1′17 has been replenishing stockpiles and re-engaging necessary spending. (A substantial amount of ordinary CAPEX spend was tabled 2015-2016 and now fundamental maintenance requires some spending.)

But like the E.U., the growth has come from refilling the bucket and not really advancing the economy.

Capacity Utilization jumped after the election as stocks were “re-filled.” But now it’s fading again.

The end of the “Trump Stimulus” hope will add drag in Q4 and beyond.

Obvious Signs Of Stress

The hallmark of peak consumer spending is when sales teams push unnatural acts.

When normal growth becomes unsustainable, the sales team is pushed to look for ways to keep the momentum going.

That’s happening right now in the auto sector where loan quality has eroded (less qualified buyers, longer term loans, etc). Auto Sales didn’t peak in 2017, they peaked last year. They remained high because sales teams scrambled to sell cars any way they could because organic demand was slow.

It takes a while to see, but the current slow auto sales environment is coming despite the unnatural sales acts. That is, after trying every trick in the book – sales are still slowing.

Now comes the blowback: subprime delinquencies have surged, 84 month loans are at 6% of total auto sales – a sign of the desperation out there. It’s pulling in future sales today.

So now take the auto sector and extrapolate from there – what other sectors have boosted today’s sales at the expense of tomorrow’s?  And how much has depended on student loans?

Understand that ~80% of student loans are not used for tuition. It went to cars, vacations, home buying and so on.

That capital flow is still massive (+$100B yr/yr) but it is also slowing: the yr/yr growth rate has fallen <10%.
Basically, another force driving the U.S. economy is starting to taper.

Going forward: macro data will slip.

As we get deeper into Q4, the comps get less favorable. Then we get more Chinese-driven deflation as their demand continues to slow and that hits material prices again. The E.U. will also start to flash slower growth. Same with U.S.

The Supply Chain Is Preparing For Slower Growth In 2018

An interesting bit of color is coming from the semiconductor space which has been on a phenomenal roll.

Like the rest of the industrial space, semiconductor companies hit the brakes on expansion in 2015. As demand caught up and supply was restrained, customers faced limited supplies and have been paying higher component prices.

But semiconductor producers are also aware that the cycle turns down and they expect it to slow again in 2018.  In fact, they are planning for it.

KEY TAKEAWAY: All of this slower growth narrative runs counter to consensus expectations. 2018 E.U. GDP is expected to be faster than this year’s.

So what should we expect? With Central Banks talking a tightening trajectory, fundamentals are going to come back in fashion.

  • Timing: Q1 seems to be the inflection point when macro starts to look consistently worse.
  • Degree: Lots of debt exposure in the private sector. It’s more manageable than in 2007, but it’s also nominally higher and just as central to the economy. Fire sales may not be as widespread or deep, but it will be ugly nevertheless
  • What to watch:
    • U.S.: inflation (trucking prices), wage growth (esp. Jobless claims y/y), corporate profits
    • EU: trade esp. Sweden (the canary in the German coalmine)
    • China: M1 supply, trade

Under these conditions, Stronger US dollar is likely for the usual reasons (currency manipulation, flight to safety, etc)


Andrew Zatlin

Editor of Moneyball Economics

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