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Ready. Set. Get Prepared For Inflation!

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The Three Horsemen of Inflation

  • Trucking inflation
  • Cell phone inflation
  • Wage inflation

Trucking Inflation Is Just Getting Started

U.S. cargo shipments contracted throughout 2015 and 2016.

This was evident in both rail and trucking. But trucking is special: 70% of goods in the U.S. get shipped by truck. So naturally inflation in the trucking industry has a major impact throughout the economy (a ripple effect, if you will.) .

Truck contract rates began to rise on a year-over-year basis in 2Q17, moving steadily higher to 5%. More importantly, spot rates surged to 20+%.  That’s the tell-tale sign of inflation.

Demand explains a lot of the pressure. Strong farm harvests pushed up loads. Also, the hurricanes sparked a scramble: to ensure product inventories, to haul away the damage, and to haul in building supplies. That’s on top of already growing demand.

Supply has also been a problem though.

Starting Dec. 18th, Federal regulations mandated electronic logging of hours spent driving.  Many truckers decided to quit instead of working under conditions of extra cost and less income.

The combination of higher demand and fewer truckers is adding enormous cost pressure in the supply chain.

Cell Phone Deflation Ends, Inflation Returns

Last year I pointed out that CPI was already reporting 2% inflation. We just needed to look past the single line-item of wireless services. Here’s the math that goes into calculating CPI.

Communications Services are 3% of total CPI and 4% of CPI ex food & energy. Wireless services are about half of the Communication Services.

Starting in 2016 and accelerating into 2017, the CPI of wireless services deflated at an incredible and accelerating rate: -14% y/y.  In essence, for almost 2 years, wireless services deflation has been shaving 20 basis points (bps) from the monthly CPI ex food & energy.

This, of course, is nonsense. It was so ludicrous, even the Fed was forced to comment on it.

At the June 2017 FOMC, Janet Yellen said: “The recent lower reading on inflation has been driven significantly by what appears to be one-off reductions in certain categories of prices such as wireless telephone services.”

Put differently, CPI ex food & Energy has been running at 2%.
But as the data shows, that deflation is slowing down.

Time For Wage Inflation

Average Hourly earnings have jumped recently for transient reasons.

They jumped in July because of the timing of the survey period (ends on the 12th) and the payroll period (ends on the 15th but day of week varies).

They jumped again on the hurricanes in September.  Although they dipped in October, the hourly rate is still high and reflects the lingering impact of the hurricane.   Indeed, Construction and Transportation are where the impact has been focused – both sectors where the hurricane drove up demand.

Certainly the accelerating trucking rates demonstrate that wages in transportation will only continue to inflate.  And homebuilders are reporting that they have had to pay higher wages.

Look past the transient factors and there are signs of accelerating demand for workers.

For example, employers are asking workers to put in more time.  Note the sustained elevated levels of overtime and average weekly hours worked:

Overtime is especially important: employers prefer to pay overtime instead of hiring new employees. At a certain point, sustained overtime leads to more hiring and more wage pressure.  That’s what we are seeing.

Wages moved up strongly in December, at the highest rate in over a year (if we look past the anomalies of the Hurricanes and the July event).

KEY TAKEAWAY: We’re starting to see signs of inflation across some of the most important metrics economists look at… yet it’s not being widely reported. The major hurricanes in 2017 had a huge impact that rippled through the shipping and trucking industries. Meanwhile, people are working more hours and more overtime in recent past.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

Trump’s Impact On The Market Is Undeniable

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Trump’s Momentum Matters To Investors

My sense is that Trump is finally in a position to drive his agenda.

Early in the year he seemed in trouble.  The first blow was the inability to drive a repeal of Obamacare.  

Coupled with staff turnover and the rise of the Russia investigation, the administration was clearly taking punches.

But then things changed.

First, the strong macroeconomic and stock market performance is directly tied to Trump.

Second, the tax cut.  This proves the ability to rally troops to pass significant bills.

Third, the Russia investigation is clearly without merit. There is no collusion. Politically speaking, some in power have withheld support on the premise that Trump would be removed. Now they have to play ball.

Fourth, he keeps winning the fights. He put someone on the Supreme Court. He blacklisted travelers from some countries… and it actually stuck. His push against undocumented immigrants has led to a plunge in illegal border crossings.

It means Trump will have an easier time of pushing the next stage of his agenda: infrastructure.

Trump is a builder and he gets how building drives the economy.

The Fed actually likes this – the entire U.S. economy is a hollow shell dependent on low interest rates, easy credit and other monetary policies. If the economy can pivot to more fiscal driven growth, then rates can be normalized.

Also note he is auditing the Pentagon.

Think about that for a moment.  The U.S. Federal budget essentially goes to the military and a series of social welfare benefits.  

The military has usually been a hands-off segment. Instead, reducing the Federal deficit has traditionally focused on cutting the social benefit side of the equation.

Suddenly, we may be able to have our cake and eat it too.  The goal of the Pentagon audit is to reduce the budget but not affect the deliverables.

Even approaching this Holy Cow is a big win.

KEY TAKEAWAY: Going back to the Trump agenda, the word is that next month he announces a spending plan that emphasizes infrastructure. Building and repairs.

I need to look at the companies that play in that space, but watch some big moves. I’ll keep an eye out for you on how to best play this industry.

His impact on equity markets are undeniable.

Andrew Zatlin

Editor of Moneyball Economics

Vice Index – Where The U.S. Economy Stands Today Into 2018

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US Consumer spending is accelerating again.  Just in time for the Holiday Season.  Consumer confidence is driving a boost in holiday spending.

(Note: The Vice Index is lagged 5 months)

November Sees Several Positive Spending Tailwinds

For starters, holiday shopping started early: rather than wait for Black Friday in late November, many retailers started offering sales in early November.

Other positive trends were:

  • Mild weather: mild weather brings out more shoppers.
  • New iPhone will add to sales
  • Solid macroeconomic conditions: The economy moved at a steady pace.

One major headwind was the reversal of the hurricane recovery spending.  From auto sales to furniture. Building materials and appliances. Hurricane recovery spending pushed up retail.  

Now it’s reversing and that will be a drag.

Households Spending Beyond Everyone’s Means

The pace of consumption exceeds the pace of compensation.  


It’s a signal suggesting consumer confidence. It’s typically seen in port-recession recovery periods.

Against the background of steadily decelerating Compensation growth, does this mean that consumers are confident about future wage growth?  Maybe not.

I’ll tell you now, household finances are not healthy:

Credit card spending (revolving debt) has been accelerating the last few months

Savings rate is bouncing off the lowest levels since the recovery began

The savings rate is most noteworthy because, as the above charts shows, it tends to plunge in the run-up to recessions.  Meaning that households struggle to keep up their lifestyles and must tap into their savings.

Food Services spending echoes that pullback in savings.  

In short, households are borrowing against the future. Because they must. And because they feel that they can.

No doubt the strong stock and housing markets are adding to the willingness to spend.  

One last data point to consider: consumer goods imports rose again (largely on smartphones). Retailers are seeing strong demand and have boosted imports: October imports tend to be November sales.

A Split Economy?

It’s likely the U.S. has an economy where the upper income families are doing well but the lower income households are under more stress.

Non-farm Payrolls reflects a trend where higher paying white collar jobs have picked up this year whereas lower-paying jobs (temp workers, Retail,, Leisure & Hospitality) have been stagnant in the second half.  

Is that getting picked up in consumer discretionary spending?

Well, consider diamond purchases. After trending down throughout 2015, prices strengthened for diamonds 1 carrot and larger.

But the sweet spot for lower-income buyers is the smaller 0.5ct-1ct.  And prices not only continued their downward trend, they are about to turn negative.

Gambling Slips Again

Gambling continues to reflect a pullback in fun-money spending.

There’s just no growth. No doubt real-world inflation (oil is up 20%+ for the year) is weighing on lower-income gamblers.

Key Takeaway: Black Friday was a massive confidence booster for all those looking at the health of the consumer. But peel back the curtain, and you see a different picture starting to unfold. The consumer is weakening. You can see it through the discretionary spending from gambling is decreasing. Consumers continue to plunge further into debt. All while savings rates are trending down.

The jury isn’t out. But there are major warning signs. 2018 will be an interesting year.

Andrew Zatlin

Editor of Moneyball Economics

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.

Gambling
(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.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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