By New Deal Democrat
At the beginning of this year, I identified graphs of 5 aspects of the economy that most bore watching. Now that we are 3/4ths through the year, let's take a look at each of them.
#5 The yield curve
The Fed attempted to embark on a tightening regimen last December. The question became, would the yield curve compress or, worse, invert - an inversion being a nearly infallible sign of a recession to come in about 12 months? It turned out that the weakness in the world economy plus Brexit caused a moderate compression just at the long end:
After the June Brexit vote, the 10-year Treasury fell to all-time lows (typically, long rates only start to fall once the tightening cycle has caused the economy to weaken). Indeed, weakness in the economy has put the Fed back on hold all this year. The bottom line is that the yield curve is still quite positive when seen in a historical perspective.
#4 The trade-weighted US dollar
Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US dollar that began in late 2014 - which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.
Here, there has been a big change:
Against all currencies, the US dollar has recently been in the range of unchanged to 3%+ YoY - a more typical, if still elevated, range. Against major currencies, the US dollar has actually declined YoY for most of this year. This is good news.
#3 The inventory-to-sales ratio
An elevated ratio of business inventories to sales means businesses are overstocked. This has frequently, but not always, been associated with a recession. I have been using the wholesalers inventory-to-sales ratio, since it has fewer secular issues. This ratio increased has fallen significantly since its high in January:
The good news is that this kind of fall tends to happen as a recession ends. The bad news is that it hasn't fallen more, telling us that the industrial economy is still weak.
#2 Discouraged workers
While 2015 saw a big improvement in involuntary part-time employment, this trend has completely stalled in the last 12 months:
We are still at least 1,500,000 above a "good" number. Worse, this kind of stall is something that we see as a cycle is approaching its peak.
#1 Underemployment and wages
The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion. In this expansion, however, until recently, nominal increases averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle- and working class purchasing power.
There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part-time workers.
This expanded "U6" unemployment rate (minus 10%) is shown in blue in the graph below, together with YoY nominal wage growth (minus 2%):
In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate. U6 has been under 10% for close to a year, and there has been some mild improvement off the bottom. More than anything, the US needs real wage growth for labor, and the present nominal reading of 2.6% still isn't nearly good enough. With the expansion in deceleration mode well past mid-cycle, it is not clear at all how much further improvement we are going to get before the next recession hits.