Economic Dashboard: Current High-Frequency Indicators
With the release today of the Personal Consumption data we now have the complete suite of H.F. economic indicators thru Feb. available so we're going to update them all and the associated charts. As you'd expect, at least in our views of the world, there were no real surprises and consumption continued its' downtrend. Now if you pay attention to the headlines spending edged up 0.1% and was flat after adjusting for inflation. But in real consumer spending was up ~ 1.7% YoY, which sounds like good news until you understand that it ran above 3.0% for most of the last two years and began slowing in the Fall. And further that real Retail Sales has turned negative. After the break we'll go into that as well as the investment indicators, the outlook for consumer spending and the monetary, price and interest rate indicators. By and large all of which showed continued deterioration.
What we want to jump off with those is a deeper dive into the things that show where Consumer spending is going. There are three primary drivers: real Wage growth, Employment growth and the ability to borrow. As we've discussed the latter held up consumer spending thru the downturn thru MEW but is rapidly going away for the obvious reasons. So let's take a look at a longer baseline for Wages and Employment. In some ways the charts almost speak for themselves but let's add a few words. In the first sub-chart you can see where real Wages have actually been trending down except for two blips since Jan00. The latest and biggest blip was the god's gift of lower oil prices and inflation in late '06 which probably held things up thruout '07 and staved off a recession then. That's all reversed. Employment growth was never very robust and has slowly been deteriorating the middle of '06 in a very steady downtrend. The latest YoY numbers were ~ .6% which is recessionary in and of itself. As we proceed along the cycle you can anticipate further declines in both these numbers. So as you look at the charts below, which cover a shorter timeframe, keep all this in mind.
Current Indicators: Consumption + Investment 
Let's start by looking at the combined chart for current activity. The upper sub-chart shows real Consumption (PCE), real Retail Sales and Auto Sales on a YoY% basis. After holding steady for a while PCE has been drifting down but the real interesting thing is real Sales. Retail has been slowing sharply since the late Fall no matter what the headlines would have had you believe while Autos, which are on the r.h.s. btw, have been negative the entire period here.
On the Investment front New Home Sales continue to abysmal indeed with a 3MoMA showing a YOY% decline of 34% ! The other fun news we went into in detail yesterday with a thorough composite view of the longer term outlook. Which is indeed looking like a harsh reality that still hasn't sunk in yet (More Dialog: Facing Harsher Realities in Housing).There was a blip in New Capex Orders which we don't have a good explantion for though it may just be a return to the bigger downtrend. We'll have to see how that plays out as it isn't consistent with any other data - it is amusing though that all the headlines were touting the surprise MtM negative s.
Future Indicators: Wages + Employment 
We started by taking a look back to Jan00 at the growth in these but let's focus now on our normal charts which related them together and to consumption and sales activity. At this finer level of detail you can see that Real Wage growth is not only headed down but turned negative in the Fall and appears to be acclerating. Other than job market pressures consider that the Oil Inflation tax on spending power. Similarly Employment growth is very low though not yet negative. The result is W+E growth which has turned negative.
Over the long-run changes in PCE are driven by W+E changes which you can begin to see in the second sub-chart but is very...very clear when comparing it to real Retail Sales. In fact the uncanny tracking may just be a charting artifact but it's kinda scary to me. Think about this little relationship:
W+E(-) ==> Real Sales (-) ==> PCE (-) ==> GDP(-) ==> Employ(--)
where (-) is a minus sign or downtrend with the number indicating the relative strength.
Interest Rates, Money and Rates
We could probably leave it there but let's try to pierce the veil of money a bit since, as we should all be in the process of learning by now, money, rates and credit markets are vitally important to the functioning of the real economy (Wall St. turns out to impact Main and visa versa indeed). BtW just in case you're not too concerned we reviewed the last minute avoidance of the collapse of Western Civilization in the previous post. And discussed five fundamental structural changes you ought to pay some attention to. Five "Funny" Things on the Way to the Market
Anyway back to the regular program of looking at the details.The first sub-chart shows the spread
between 3Mo Treasuries and paper which is still wide but narrowed a tad, which is a good thing. Interestingly the Fed Fund vs 10Yr Treasuries widened considerably, which might be taken as either a return of a normal cyclic expectations, i.e. a normal yield curve. Or as an indicator that the credit crisis, which resulted in credit tightening and reduced credit availability, is still with us. In other words no matter what the Fed has been doing on rates the pipes are so clogged up that the funds aren't getting to the economy (Continuing the Dialog: Facing Realities in the Credit Market). That latter view is reflected in the inflation-adjusted Monetary Base indicator. Think about that one very carefull. The MBase is the amount of effective funds available to run the economy, inflation-adjustments put it into real terms and the YOY% changes tells us how it's working. Unfortunately it doesn't appear on this frequency to be working very well at all since YOY rates are still -3% !!! Notice that the abrupt shrinking of the Mbase corresponds exactly to the onset of the crisis last August ! The Fed may have save us from collapse but there's still a lot of work to do here. Let's try that again and this time with some oomph, please !
No matter what the Fed has done the real money supply has been shrinking
since the start of the credit crisis and nobody has noticed.
The next sub-charts show CPI as being well out of the comfort zone around 4% and PPI being downright scary in the neighborhood of 10%. Aside from being transmitted into CPI unless the slowing economy manuver works think about what that implies for margins and earnings - a pressure showing up in the Consumer companies and a threatened trucking strike. Normally you'd expect to see interest rates headed up in that sort of environment but the divergence between the 10YR and inflation is pretty wide. Which is not independent of the third sub-chart which shows contineud YOY declines of -10% in the dollar and increases in Oil prices of ~ 70% !! Whee, are we having fun yet ?
BtW as those all interact with a lower dollar increasing oil prices and feeding back to inflationary pressures which in turn drives up oil and drives down the dollar. If the Chinese and the ME ever stop pegging their currencies to ours interest rates will have to take a huge jump to protect the dollar AND keep pulling in the foreign fund flows that are keeping us afloat. Comes 'round, goes 'round indeed.
Comments
My question is about the the inflation-adjusted Monetary Base indicator. I noticed you mentioned in your excellent article that MBase is the amount of effective funds available to run the economy.
What role do M2 and M3 play in this respect?
Why is Europe, UK, Japan and the rest of the world focusing on M3 as the measure for monetary growth?
Would that not be a better indicator for a inflation forecast than MBase?
The ECB certainly thinks that way.
Posted by: Alfred | April 16, 2008 12:08 PM
A good question but there's actually a couple of things going on which I obviously need to clarify. An overall increase in the money supply, as you clearly know, is part of the fuel for inflation. That's standard of course and one can use various of the supply indicators though I believe the Fed has stopped publishing M3 in this country.
However the adj. Monetary Base indicator is being used to look at a different problem - is there enough money available to actually run the economy. Normally one could look general MS indicators but borrowing (stealing) from Paul Kasriel at Northern Trust I've found that the inflation-adjusted base tells you whether real money is growing or shrinking. And unfortunately it's shrinking somewhat seriously - which tells us that everything the Fed has down to lower rates and unclog the credit market isn't working very well because tighter credit is restricting real money.
Does that help at all ?
Posted by: dblwyo | April 16, 2008 04:03 PM
Thank you for your reply, it certainly helped.
However it is not clear to me how MS that's enough to stimulates the growth of the economy is in itself not sufficient to stimulate inflation. If it were we would not refer to M2 and M3 as the appropriate indicators. The argument seems to be that the flow of money into other aggregates that are excluded from the monetary base are fueling inflationary pressures. Can you comment on these other aggregates a bit or am I completely off base here?
Posted by: Alfred | April 16, 2008 04:41 PM
Not off base at all. First response is that I may need to do some more thinking. Two thoughts for now though. If one were to do the same thing for M2 and M3 similar answers might come up. The Monetary Base is "adjusted" by the Fed to reflect the reserve requirements which may be going up. Haven't investigated.
2nd and more important though is that this isn't your typical post-war inflation driven by rising money supply. It's being driven by cost increases in key supplies, e.g. food, energy, etc. Plus rising labor costs in China and India. China has jump-shifted in the last year from being an exporter of deflation to an exporter of inflation.
Any attempts to offset these cost-push factors would lead to a sudden increase in the severity of the downturn.
For all practical purposes traditional monetary policy is not as effective in these situations as we're used to thinking of it. If we don't free up the credit mechanisms AND get some serious fiscal stimulas there's serious trouble ahead. You might want to check out the archives on the blog on the Credit Markets and the Fed for some background.
But thanks for the comments - though-provoking.
Posted by: dblwyo | April 16, 2008 05:12 PM