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Steven Hansen
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Steven Hansen is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.
My company:
Econintersect LLC
My blog:
Global Economic Intersect
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  • The Federal Reserve May Not Be Expert Enough To Manage The Economy

    Yesterday, Fed Chair Janet Yellen admitted:

    Of course, the outlook for the economy, as always, is highly uncertain. I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so. For many reasons, output and job growth over the next few years could prove to be stronger, and inflation higher, than I expect; correspondingly, employment could grow more slowly, and inflation could remain undesirably low.

    This means that monetary policy is reactionary and not proactive even though the Fed takes steps to guide the economy. So it is important to understand what is her understanding of the state of the economy.

    Chair Yellen's view of the labor situation is better than mine.

    The unemployment rate has come down close to levels that many economists believe is sustainable in the long run without generating inflation. But the unemployment rate today probably does not fully capture the extent of slack in the labor market. To be classified as unemployed, people must report that they are actively seeking work, and many people without jobs say they are not doing so--that is, they are classified as being out of the labor force. Most people out of the labor force are there voluntarily, including retirees, teenagers, young adults in school, and people staying home to care for children. But I also believe that a significant number are not seeking work because they still perceive a lack of good job opportunities.

    In addition to those too discouraged to seek work, an unusually large number of people report that they are working part time because they cannot find full-time jobs, and I suspect that much of this also represents labor market slack that could be absorbed in a stronger economy. Finally, the generally disappointing pace of wage growth also suggests that the labor market has not fully healed. Higher wages raise costs for employers, of course, but they also boost the spending and confidence of customers and would signal a strengthening of the recovery that will ultimately be good for business. In the aggregate, the main measures of hourly compensation rose at a rate of only around 2 percent through most of the recovery.

    The lack of growth of median incomes are the evidence that we are not close to full labor utilization. I do not agree that most people out of the workforce were voluntary - they chose this route only because it was the best option in a crappy jobs market with low wages. This is a major divergence of opinion as it magnifies labor slack.

    Chair Yellen thinks inflation is under control.

    This improvement in the labor market has brought the economy closer to one of the two goals of monetary policy assigned to the Fed by the Congress--maximum employment. Less progress has been made toward the other goal, price stability. Consumer price inflation remains below the Fed's stated objective of 2 percent. The notion that inflation can be too low may sound odd, but over time low inflation means that wages as well as prices will rise by less, and very low inflation can impair the functioning of the economy--for example, by making it more difficult for households and firms to pay off their debts. Overall consumer price inflation has been especially low--close to zero--over the past year, as the big fall in oil prices since last summer lowered prices for gasoline, heating oil, and other energy products. But inflation excluding food and energy, which is often a better indicator of where overall inflation will be in the future, has also been low, below the Fed's 2 percent objective both now and for almost all of the economic recovery. Inflation has been held down by the continued economic weakness during the slow recovery and, more recently, by lower prices of imported goods as well as the fall in oil prices. With oil prices no longer declining, and with the public's expectations of future inflation apparently stable, my colleagues on the Federal Open Market Committee (FOMC) and I believe that consumer price inflation will move up to 2 percent as the economy strengthens further and as other temporary factors weighing on inflation recede.

    Wow. The Fed embedded very low interest rates into the economy and does not appear to understand their effect on inflation. It is oil prices, cheaper imports and consumers low inflation views which caused low inflation according the Fed's view - and they are not seeing the causes behind oil prices, cheaper imports and consumers low inflation views.

    According to Chair Yellen, there are three reasons for slow economic growth:

    1. ... the fact that the housing crash left many households with less wealth and higher debt, weighing on consumer spending...
    2. ... has come from changes in fiscal policy to reduce budget deficits...
    3. ... the restraining influences on the United States from the global economy.

    Nowhere on this list do I see understanding of the long term effects of the economic drugs of quantitative easing or low interest rates. In life, there is no such thing as a purely positive action. Drugs have positive and negative affects - and there is no evidence that economic drugs are any different then pharmaceutical drugs. where is understanding of contraindications (monetary and fiscal policies which should not be used together), or adverse drug reaction from short or long term administration,

    Being smart is not necessarily an advantage when it blinds one to assembling facts - or believing a fact is transitory - or misdiagnosing cause and effect. You cannot solve a problem unless you understand the cause. Believing an effect is a cause will always make your remedies fail.

    Other Economic News this Week:

    The Econintersect Economic Index for May 2015 is indicating growth will continue to be soft. The tracked sectors of the economy are relatively soft with most expanding but some contracting. The effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) and weather related issues are no longer evident in the raw data. Therefore, the economic slowdown forecast last month is cyclic and not resulting from transient causes.

    The ECRI WLI growth index is now in positive territory but still indicates the economy will have little growth 6 months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 265,000 to 280,000 (consensus 270,000) vs the 274,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 271,750 (reported last week as 271,750) to 266,250. The rolling averages have been equal to or under 300,000 for most of the last 7 months.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: Tortola, British Virgin Islands-based OAS Finance Limited

    To view all of our analysis this week - [click here].

    May 23 7:59 AM | Link | 4 Comments
  • The Data Is Showing The Economy Is Slowing But .....

    Again the markets reached new highs on thin trading - all while there is continuing slowing of the coincident data. Some are predicting an upturn in the USA economy by year end - but my vision is limited to a shorter period.

    The deal here is that we are NOT in a recession - but in a downward trending expansion cycle. It does seem to me that the cycle has bottomed - but I am not a chartist (because I believe data lies when it is manipulated by monetary policy) - so I would not extrapolate my view that we are at a cycle bottom.

    What continues to be a "marker out of place" is rail carloads - which is showing we are in a recession. I have stared at the data for long periods trying to understand - I am drawing a blank. Seems to me there are portions of the economy recessing right now which should be connected to portions which are expanding - yet this disconnect exists.

    This week, the important release was industrial production. The headlines say seasonally adjusted Industrial Production (NYSE:IP) declined. This month the manufacturing portion of this index was unchanged month-over-month - but the other portions of industrial production declined. This is another weak report, and again under expectations.

    • Headline seasonally adjusted Industrial Production decreased 0.3% month-over-month and up 1.9% year-over-year.
    • Econintersect's analysis using the unadjusted data is that IP growthdecelerated 0.3% month-over-month, and is up 1.9% year-over-year.
    • The unadjusted year-over-year rate of growth decelerated 0.7% from last month using a three month rolling average, and is up 2.5% year-over-year.
    • The market was expecting:
    Headline Seasonally AdjustedConsensus RangeConsensusActual
    IP (month over month change)-0.3 % to 0.4 %+0.0%-0.3 %
    Capacity Utilization78.1 % to 78.7 %78.4%78.2%
    IP Subindex Manufacturing (month over month change)0.0 % to 0.4 %+0.2%+0.0%

    IP headline index has three parts - manufacturing, mining and utilities - manufacturing was unchanged this month (up 2.3% year-over-year), mining down0.8% (up 1.3% year-over-year), and utilities were down 1.3% (up 0.1% year-over-year). Note that utilities are 9.8% of the industrial production index, whilst mining is 15.9%.

    Comparing Seasonally Adjusted Year-over-Year Change of the Industrial Production Index (blue line) with Components Manufacturing (red line), Utilities (green line), and Mining (orange line)

    Unadjusted Industrial Production year-over-year growth for the past 2 years has been between 2% and 4% - it is currently 1.9%. It is interesting that the unadjusted data is giving a smooth trend line.

    Year-over-Year Change Total Industrial Production - Unadjusted (blue line) and the Unadjusted 3 month rolling average (red line)

    z ip3.PNG

    Economic downturns have been signaled by only watching the manufacturing portion of Industrial Production. Historically manufacturing year-over-year growth has been negative when a recession is imminent. This index is not indicating a recession is imminent.

    So industrial production is weak - but this is a coincident indicator at best (and a lagging indicator because the initial release of the data is not accurate). It tells me nothing about the future.

    Hope you had a great week.

    Other Economic News this Week:

    The Econintersect Economic Index for May 2015 is indicating growth will continue to be soft. The tracked sectors of the economy are relatively soft with most expanding but some contracting. The effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) and weather related issues are no longer evident in the raw data. Therefore, the economic slowdown forecast last month is cyclic and not resulting from transient causes.

    The ECRI WLI growth index is now in positive territory but still indicates the economy will have little growth 6 months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 265,000 to 280,000 (consensus 276,000) vs the 264,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 279,500 (reported last week as 279,500) to 271,750. The rolling averages have been equal to or under 300,000 for most of the last 7 months.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: Isle of Man-based Murray Holdings Limited (aka Isis Investments Limited), American Eagle Energy, Patriot Coal

    For a view of all of our analysis this week - [click here].

    May 16 5:18 AM | Link | 3 Comments
  • Employment Situation Good And Trade Data Bad?

    All eyes last week were on the BLS jobs situation - where the high April non-farm private jobs growth of 213,000 pleased the market. However, if last month's data was not revised down - the figure would have been 175,000. This 175,000 is very close to ADP's 169,000 employment growth.

    The market is very superficial in its analysis.

    The trade data for March was surprisingly bad.

    • Import goods growth has positive implications historically to the economy - and the seasonally adjusted goods and services imports were reported up month-over-month. Econintersect analysis shows unadjusted goods (not including services) growth acceleration of 6.4% month-over-month (unadjusted data).The rate of growth 3 month trend is accelerating.
    • Exports of goods were reported up, and Econintersect analysis shows unadjusted goods exports growth deceleration of (not including services) 1.7% month-over month. The rate of growth 3 month trend is decelerating.
    Non-Adjusted Year-over-Year 3 Month Rolling Average - Goods Export (blue line) and Goods Import Excluding Oil (red line)

    (click to enlarge)

    z trade2.PNG

    • The increase in seasonally adjusted exports was strength in capital goods. Import increase was primarily due to consumer goods.
    • The market expected a trade deficit of $37.8 to $45.0 billion (consensus $42.0 billion deficit) and the seasonally adjusted headline deficit from US Census came in at a deficit of $51.4 billion.
    • It should be noted that oil imports were up 34 million barrels from last month, and up 1 million barrels from one year ago.
    • The data in this series is noisy, and it is better to use the rolling averages to make sense of the data trends.

    The headline data is seasonally but not inflation adjusted. Econintersect analysis is based on the unadjusted data, removes services (as little historical information exists to correlate the data to economic activity), and inflation adjusts. Further, there is some question whether this services portion of export/import data is valid in real time because of data gathering concerns. Backing out services from import and exports shows graphically as follows:

    Inflation Adjusted But Not Seasonally Adjusted Year-over-Year Change Goods Export (blue line), Goods Import Excluding Oil (red line), and Goods Import with Oil (yellow line)

    (click to enlarge)

    Other Economic News this Week:

    The Econintersect Economic Index for May 2015 is indicating growth will continue to be soft. The tracked sectors of the economy are relatively soft with most expanding but some contracting. The effects of the recently solved West Coast Port slowdown (a labor dispute which had been going on for months) and weather related issues are no longer evident in the raw data. Therefore, the economic slowdown forecast last month is cyclic and not resulting from transient causes.

    The ECRI WLI growth index remains slightly in negative territory which implies the economy will have little growth 6 months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 275,000 to 285,000 (consensus 280,000) vs the 265,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 283,750 (reported last week as 283,750) to 279,500. The rolling averages have been equal to or under 300,000 for most of the last 7 months.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)

    (click to enlarge)

    Bankruptcies this Week: Corinthian Colleges, AVT, Magnetation

    For a summary of all analysis this past week - [click here].

    May 09 1:49 AM | Link | 1 Comment
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