Economic clouds keep gathering

Over the last week, we've seen a number of reports that indicates the sugar high the US economy has been on is wearing off, and things are coming down. It may not be as rash as the 10%+ drops we've seen in the stock market in the last month, but it's still seems like economic storm clouds are gathering.

I'll have a separate report on last week's November jobs report, which had job growth slowing down to 155,000 jobs, although it certainly goes along with this theme. Instead, I'll start with this report from last week, which doesn’t make me confident that America is winning in the trade wars.

The U.S. trade deficit jumped to a 10-year high in October as soybean exports dropped further and imports of consumer goods rose to a record high, suggesting the Trump administration's tariff-related measures to shrink the trade gap likely have been ineffective….

The reports added to weak housing and business spending on equipment data in signaling a slowdown in economic growth. Concerns over the health of the economy have roiled financial markets in recent days.

The Commerce Department said the trade deficit increased 1.7 percent to $55.5 billion, the highest level since October 2008. The trade gap has now widened for five straight months. Data for September was revised to show the deficit rising to $54.6 billion instead of the previously reported $54.0 billion.

The politically sensitive goods trade deficit with China surged 7.1 percent to a record $43.1 billion in October.

In addition, construction spending declined for the 3rd month in a row in October.

Total Construction Construction spending during October 2018 was estimated at a seasonally adjusted annual rate of $1,308.8 billion, 0.1 percent (±1.5 percent)* below the revised September estimate of $1,310.8 billion. The October figure is 4.9 percent (±1.6 percent) above the October 2017 estimate of $1,247.5 billion. During the first ten months of this year, construction spending amounted to $1,096.4 billion, 5.1 percent (±1.2 percent) above the $1,043.6 billion for the same period in 2017.

Private Construction Spending on private construction was at a seasonally adjusted annual rate of $998.7 billion, 0.4 percent (±0.8 percent)* below the revised September estimate of $1,003.0 billion. Residential construction was at a seasonally adjusted annual rate of $539.0 billion in October, 0.5 percent (±1.3 percent)* below the revised September estimate of $541.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $459.7 billion in October, 0.3 percent (±0.8 percent)* below the revised September estimate of $461.3 billion.

Public Construction In October, the estimated seasonally adjusted annual rate of public construction spending was $310.2 billion, 0.8 percent (±2.6 percent)* above the revised September estimate of $307.8 billion. Educational construction was at a seasonally adjusted annual rate of $76.9 billion, 2.6 percent (±2.3 percent)* above the revised September estimate of $75.0 billion. Highway construction was at a seasonally adjusted annual rate of $94.6 billion, 0.1 percent (±6.9 percent)* below the revised September estimate of $94.6 billion.

That seems like a problem up ahead.

And this report doesn’t sound good if you work in manufacturing, or many other fields. This productivity report showed that the compensation of many jobs was not keeping up with inflation, even as the economy was growing by 3-4% in the Summer.

In the third quarter of 2018, nonfarm business labor productivity increased 2.3 percent—about the same as the preliminary estimate of 2.2 percent—as both output and hours worked increased at the same rates reported November 1. Unit labor costs were revised down 0.3 percentage point due primarily to a downward revision to hourly compensation. In the manufacturing sector, productivity increased 1.0 percent rather than 0.5 percent as previously reported, as an upward revision to output was greater than an upward revision to hours worked. Unit labor costs were revised from a 0.9-percent increase to a 1.2-percent decline for the third quarter of 2018—the combined effect of the upward revision to productivity and a downward revision to hourly compensation.

In the second quarter of 2018, labor productivity, output, and hours worked were unrevised for the nonfarm business sector. Unit labor costs decreased 2.8 percent, rather than decreasing 1.0 percent as previously reported, due to a downward revision to hourly compensation. Productivity, output, and hours worked were also unrevised in the manufacturing sector. A large downward revision to manufacturing hourly compensation resulted in a similar downward revision to unit labor costs; after revision, unit labor costs fell 6.1 percent in the second quarter of 2018, in contrast to the 0.1 percent increase reported previously. In the nonfinancial corporate sector, productivity decreased 1.9 percent rather than 0.9 percent as reported November 1, due solely to a downward revision to output; hours were unrevised. Because hourly compensation was revised down by more than productivity, unit labor costs increased less than previously reported.

In fact, despite manufacturing workers being more productive, they were losing ground after inflation was taken into account.

Real Hourly Compensation, manufacturing (annual basis)
Q3 2018 -2.2%
Q2 2018 -6.5%
Q3 2018 vs Q3 2017 -2.4%

And while it may be considered good news to find out today that the producer price index only up 0.1% for November. But that “controlled” inflation is largely due to two items. One is a drop in gas and other energy prices that we’ve been seeing at the pump in recent weeks. The other is something that has particularly plagued Wisconsin – certain farm prices that continue to fall, especially at the point of purchase before processing.

Unprocessed goods for intermediate demand: The index for unprocessed goods for intermediate demand moved down 5.3 percent in November, the largest decrease since a 9.7-percent drop in January 2015. Leading the November decline, prices for unprocessed energy materials fell 11.5 percent. The index for unprocessed foodstuffs and feedstuffs decreased 1.0 percent.

In contrast, prices for unprocessed nonfood materials less energy increased 2.4 percent. For the 12 months ended in November, the index for unprocessed goods for intermediate demand moved down 0.7 percent, the first decline since falling 4.4 percent for the 12 months ended October 2016.

Product detail: Leading the November decrease in the index for unprocessed goods for intermediate demand, crude petroleum prices fell 29.5 percent. The indexes for raw milk, slaughter barrows and gilts, fresh fruits and melons, slaughter cows and bulls, and stainless and other alloy steel scrap also moved lower. Conversely, prices for carbon steel scrap climbed 9.5 percent. The indexes for natural gas and corn also rose….

Stage 3 intermediate demand: The index for stage 3 intermediate demand fell 0.8 percent in November following a 1.6-percent increase in October. In November, prices for total goods inputs to stage 3 intermediate demand dropped 2.1 percent. Conversely, the index for total services inputs climbed 0.3 percent. Decreases in the indexes for gasoline; raw milk; primary basic organic chemicals; slaughter barrows and gilts; metals, minerals, and ores wholesaling; and jet fuel outweighed increases in the indexes for machinery and equipment parts and supplies wholesaling, slaughter poultry, and business loans (partial). For the 12 months ended in November, the index for stage 3 intermediate demand rose 3.2 percent.

Now we’ll see if that reality of a lack of inflation for producers along with a softening of the economy in general will keep the Fed from increasing short-term rates in the near future. And will a Fed pause in interest rates even matter, especially if our economy is already slowing down and possibly heading toward recession in the next year or so?

But hey, MAGA and #winning, right?