Friday, October 29, 2010
Rally to Restore Sanity
This weekend, Mr$s. Bonddad and I are at the Rally to Restore Sanity. We would encourage all those nearby to attend. We'll be back on Monday.
Weekly Indicators: the tricks vs. the treats edition
- by New Deal democrat
This week's most important statistic was surely 3rd quarter GDP, which came in at 2%,lukewarm and as expected: growth, but not enough to knock down unemployment. The Chicago PMI showed that in the Midwest at least manufacturing is still going strong. Consumers meanwhile are as gloomy as ever both about the present and the future. New and existing home sales bounced along the bottom.
Let's turn now to the high frequency weekly data.
Last Friday I said that "Purchase mortgage applications will be important to watch next week." The Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased 3.5% last week, ending several weeks of steep decline. Thus it rebounded again from a reading back near July's lows and suggests they will indeed hold. Meanwhile, the Refinance Index increased 3.0% from the previous week. Refinancing is still proceeding at a fast clip in response to near record low 15 and 30 year mortgage rates.
The ICSC reported same store sales for the week ending October 23 increased 0.3% week over week, and were up only 1.9% YoY, again a very weak comparison with recent months. Shoppertrak once again did not report.
Gas prices declined 1 cent to $2.82 a gallon. Gasoline usage soared this week compared with the same week a year ago -- up 500,000 barrels a day at 9.358 vs. 8858 a year ago. This brought gasoline stocks down considerably, to about 5% above their normal range for this time of year. Oil stayed near $81-$82 a barrel, still near the upper end of its 6 month range.
The BLS reported 434,000 new claims. With the sole exception of one week in July that was distorted by unusual auto plant cycles, this is the lowest weekly number in over two years. It's only one week, and the 4 week average is still slightly above 450,000, but this is the most hopeful sign on jobless claims all year.
Railfax continued to show improvement across the board last week, but its rate of growth is not moreso than at this time last year. Economically sensitive waste and scrap metal improved still is running no better than last year's levels. This means there is trend growth but no higher.
The American Staffing Association reported that for the week ending October 19, temporary and contract employment advanced very slightly so that the index remained at 100.0 for the 4th week in a row. This index tends to stall in November before plunging in the second half of December, but it seems to have started early this year and bears further watching.
M1 declined .5% last week, but was up 0.5% 1month over month, and up about 6% YoY, so “real M1” is up 4.9%. M2 increased .15% last week, +0.8% month over month, and up 3.3% YoY, so “real M2” is up 2.2%. "Real" M2 is inching closer to breaking out of the "red zone" of +2.5%, which would give us the "all clear" as to any "double dip."
Weekly BAA commercial bond rates increased 0.02% last week to 5.76%. This compares with yields on 10 year bonds up +.04%.
Eighteen days into October, the Daily Treasury Statement is up $121.2 B vs. $109.4 B a year ago, a gain of 11%. For the last 20 days, receipts are up $131.4 B vs. $118.8 B a year ago, a gain of about 10.5%. The 20 day metric has been stuck very close to $130 B for several months. We really need to see this start going up, but seasonality is going to obscure the results beginning in a few week.
Retail sales are trending umcomfortably closer to zero growth YoY. On the other hand, with refinancing continuing, and possibly some long-overdue relief on the layoff front, they may not fall further. Altogether the news this week verified the prediction by ECRI's Lakshman Achuthan that there will not be a "double-dip", although a "soft landing" at 9%+ unemployment is not exactly something to cheer about.
Have a nice weekend!
This week's most important statistic was surely 3rd quarter GDP, which came in at 2%,lukewarm and as expected: growth, but not enough to knock down unemployment. The Chicago PMI showed that in the Midwest at least manufacturing is still going strong. Consumers meanwhile are as gloomy as ever both about the present and the future. New and existing home sales bounced along the bottom.
Let's turn now to the high frequency weekly data.
Last Friday I said that "Purchase mortgage applications will be important to watch next week." The Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased 3.5% last week, ending several weeks of steep decline. Thus it rebounded again from a reading back near July's lows and suggests they will indeed hold. Meanwhile, the Refinance Index increased 3.0% from the previous week. Refinancing is still proceeding at a fast clip in response to near record low 15 and 30 year mortgage rates.
The ICSC reported same store sales for the week ending October 23 increased 0.3% week over week, and were up only 1.9% YoY, again a very weak comparison with recent months. Shoppertrak once again did not report.
Gas prices declined 1 cent to $2.82 a gallon. Gasoline usage soared this week compared with the same week a year ago -- up 500,000 barrels a day at 9.358 vs. 8858 a year ago. This brought gasoline stocks down considerably, to about 5% above their normal range for this time of year. Oil stayed near $81-$82 a barrel, still near the upper end of its 6 month range.
The BLS reported 434,000 new claims. With the sole exception of one week in July that was distorted by unusual auto plant cycles, this is the lowest weekly number in over two years. It's only one week, and the 4 week average is still slightly above 450,000, but this is the most hopeful sign on jobless claims all year.
Railfax continued to show improvement across the board last week, but its rate of growth is not moreso than at this time last year. Economically sensitive waste and scrap metal improved still is running no better than last year's levels. This means there is trend growth but no higher.
The American Staffing Association reported that for the week ending October 19, temporary and contract employment advanced very slightly so that the index remained at 100.0 for the 4th week in a row. This index tends to stall in November before plunging in the second half of December, but it seems to have started early this year and bears further watching.
M1 declined .5% last week, but was up 0.5% 1month over month, and up about 6% YoY, so “real M1” is up 4.9%. M2 increased .15% last week, +0.8% month over month, and up 3.3% YoY, so “real M2” is up 2.2%. "Real" M2 is inching closer to breaking out of the "red zone" of +2.5%, which would give us the "all clear" as to any "double dip."
Weekly BAA commercial bond rates increased 0.02% last week to 5.76%. This compares with yields on 10 year bonds up +.04%.
Eighteen days into October, the Daily Treasury Statement is up $121.2 B vs. $109.4 B a year ago, a gain of 11%. For the last 20 days, receipts are up $131.4 B vs. $118.8 B a year ago, a gain of about 10.5%. The 20 day metric has been stuck very close to $130 B for several months. We really need to see this start going up, but seasonality is going to obscure the results beginning in a few week.
Retail sales are trending umcomfortably closer to zero growth YoY. On the other hand, with refinancing continuing, and possibly some long-overdue relief on the layoff front, they may not fall further. Altogether the news this week verified the prediction by ECRI's Lakshman Achuthan that there will not be a "double-dip", although a "soft landing" at 9%+ unemployment is not exactly something to cheer about.
Have a nice weekend!
The Import Problem in More Detal
Lagging Nonfarm Payrolls: Is the main culprit offshoring?
- by New Deal democrat
Two days ago in the first installment of this little series I pointed out that the typically reported jobs metric, Nonfarm Payrolls, was not keeping up with almost every other measure of job growth, including private sector jobs, the Household Survey, aggregate hours worked, temporary hires, and the results generated by examining payroll tax withholding. Here's the most applicable graph in case you needed a reminder:
Yesterday I took a more in-depth look at tax withholding, refining the implications of YoY changes in monthly and 12-month incrments. In that post, I noted that Rebecca Wilder had examined the issue also at the Angry Bear. She concluded:
I respectfully disagree. To show why, let's take a look at the historical relationship between aggregate hours and payrolls:
As the above graph shows, it is typical for aggregate hours to outpace payroll growth in YoY% terms in the early part of a recovery. As the expansion matures, payrolls grow faster than aggregate hours worked. The situation now is not atypical at all, particularly when compared with past deep recessions such as 1974 and 1982.
What is particularly noteworthy in the above graph is what happened in the 2002-03 period, more than a year after the bottom of the dot-com recession of 2001. Retail sales briefly faltered in late 2002, and then picked up again - but employment didn't, leading to a period of elevated lags in YoY growth on the order of 2.5%. In all prior cases consumption and employment fell in line no later than one year after significant improvement in retail sales. This is a unique pattern (so far) since the end of World War 2.
In conclusion, as noted yesterday, it seems likely that Nonfarm Payrolls, at least from March 2010 forward, will probably ultimately be revised upward at least slightly, more in accord with the growth of tax withholding and the Household Survey. But much more significantly than that, given the recent resurgence in the US' trade deficit, it seems most likely that if the disconnect between real retail sales growth and job growth as measured by both the Household Survey and Nonfarm Payrolls is probably best explained by the continuing effects of offshoring, as the US stimulates job growth in Asia.
Two days ago in the first installment of this little series I pointed out that the typically reported jobs metric, Nonfarm Payrolls, was not keeping up with almost every other measure of job growth, including private sector jobs, the Household Survey, aggregate hours worked, temporary hires, and the results generated by examining payroll tax withholding. Here's the most applicable graph in case you needed a reminder:
Yesterday I took a more in-depth look at tax withholding, refining the implications of YoY changes in monthly and 12-month incrments. In that post, I noted that Rebecca Wilder had examined the issue also at the Angry Bear. She concluded:
Hours and employment are improving, supporting wage gains and higher tax receipts. But more importantly, the pace of tax receipt growth has not faltered, demonstrating ongoing recovery in the labor market and consumer demand.
But it's not enough. The gains in tax receipts are likely a function of firms adding back hours instead of pumping up the work force. (see my previous post with links on the "hourless recovery").
....
Both series [aggregate hours and nonfarm payrolls] found a trough in the third quarter of 2009, which is consistent with the bottom in tax receipt growth (chart above). However, the hours index has recovered quicker than has its payroll counterpart....
I respectfully disagree. To show why, let's take a look at the historical relationship between aggregate hours and payrolls:
As the above graph shows, it is typical for aggregate hours to outpace payroll growth in YoY% terms in the early part of a recovery. As the expansion matures, payrolls grow faster than aggregate hours worked. The situation now is not atypical at all, particularly when compared with past deep recessions such as 1974 and 1982.
The reason, it appears, is pretty straightforward. Aggregate hours worked is a more volatile series than private sector job change, which is similarly more volatile than total payrolls (which include government jobs). This is shown for the last 10 years in the following graph:
and here it is for the 35 years before that:
Perhaps surprisingly, it isn't the beatdown being dished out to government jobs that is the difference. Aggregate hours compared with private sector job growth also shows a similar pattern now as compared with recoveries from the steep recessions of 1974 and 1982:
Additionally, despite the difference in growth off the bottom, on a YoY% basis, the household survey and nonfarm payrolls are quite close to one another:
What is magnified this time is the difference between real retail sales and the Household survey, especially late last year:
There has also been a magnified disconnect between growth in real retail sales and nonfarm payrolls. While it does mirror recoveries from past steep recessions:
Perhaps surprisingly, it isn't the beatdown being dished out to government jobs that is the difference. Aggregate hours compared with private sector job growth also shows a similar pattern now as compared with recoveries from the steep recessions of 1974 and 1982:
Additionally, despite the difference in growth off the bottom, on a YoY% basis, the household survey and nonfarm payrolls are quite close to one another:
What is magnified this time is the difference between real retail sales and the Household survey, especially late last year:
There has also been a magnified disconnect between growth in real retail sales and nonfarm payrolls. While it does mirror recoveries from past steep recessions:
What is particularly noteworthy in the above graph is what happened in the 2002-03 period, more than a year after the bottom of the dot-com recession of 2001. Retail sales briefly faltered in late 2002, and then picked up again - but employment didn't, leading to a period of elevated lags in YoY growth on the order of 2.5%. In all prior cases consumption and employment fell in line no later than one year after significant improvement in retail sales. This is a unique pattern (so far) since the end of World War 2.
In conclusion, as noted yesterday, it seems likely that Nonfarm Payrolls, at least from March 2010 forward, will probably ultimately be revised upward at least slightly, more in accord with the growth of tax withholding and the Household Survey. But much more significantly than that, given the recent resurgence in the US' trade deficit, it seems most likely that if the disconnect between real retail sales growth and job growth as measured by both the Household Survey and Nonfarm Payrolls is probably best explained by the continuing effects of offshoring, as the US stimulates job growth in Asia.
3Q GDP Up 2%; Imports Growing Problem
From the BEA:
Let's take a look at the individual data points, starting the PCEs
Real PCEs overall are increasing at a decent rate. Also note the pace of quarter to quarter increases in increasing slightly.
Services, which account for the largest percentage of PCEs increased strongly last quarter, in line with the pre-recession pace.
Non-durable goods expenditures are also increasing in line with their pre-recession levels.
And durable goods purchases are also increasing.
Bottom line: the consumer is adding to the recovery. This time around the consumer was responsible for 2% of overall growth.
Let's turn to investment:
Non-residential structures increased slightly last month, although I would not count on this being a strong area of growth going forward as there is a tremendous oversupply in this area.
Fixed equipment and software increased, although the pace of increase is decreasing.
After adding to growth last quarter, residential investment subtracted from growth last month.
Gross private domestic investment added 1.54 to the overall growth rate, meaning the US is economy is adding sufficient investment to move forward.
Once again, imports took a big bite out of GDP, subtracting 2.61 from overall growth. This is a very big deal and indicates the import situation is developing into a primary problem going forward.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.
The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the third quarter, based on more complete data, will be released on November 23, 2010.
The increase in real GDP in the third quarter primarily reflected positive contributions fro personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, federal government spending, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The small acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports.
Let's take a look at the individual data points, starting the PCEs
Real PCEs overall are increasing at a decent rate. Also note the pace of quarter to quarter increases in increasing slightly.
Services, which account for the largest percentage of PCEs increased strongly last quarter, in line with the pre-recession pace.
Non-durable goods expenditures are also increasing in line with their pre-recession levels.
And durable goods purchases are also increasing.
Bottom line: the consumer is adding to the recovery. This time around the consumer was responsible for 2% of overall growth.
Let's turn to investment:
Non-residential structures increased slightly last month, although I would not count on this being a strong area of growth going forward as there is a tremendous oversupply in this area.
Fixed equipment and software increased, although the pace of increase is decreasing.
After adding to growth last quarter, residential investment subtracted from growth last month.
Gross private domestic investment added 1.54 to the overall growth rate, meaning the US is economy is adding sufficient investment to move forward.
Once again, imports took a big bite out of GDP, subtracting 2.61 from overall growth. This is a very big deal and indicates the import situation is developing into a primary problem going forward.
Yesterday's Market
Yesterday, we had two markets. In the AM we had a gap higher (a), followed by a down, up down market (b). In the afternoon, prices moved higher, but did so very slowly, inching up the EMAs (c).
On the daily chart, the EMAs are still in the most bullish orientation possible (a). In addition, the A/D line and the CMF both indicate new money is flowing into the market (c and d). However, the MACD indicates that momentum is decreasing (b).
The Treasury market is finally starting to sell off a bit. Notice that the shorter EMAs (the 10 and 20) are now moving lower and the 10 day EMA has moved below the 20 day EMA (a). Prices are now below the 50 day EMA as well. The MACD telegraphed this move with the decreasing momentum (a). Also notice the big drop in the A/S and CMF lines (c and d) indicating that money is leaving the market.
It's looking more and more like the dollar is putting in a temporary bottom at these levels. Notice that prices are clustered around the EMAs (a) and the 10 day EWA is now moving sideways. The MACD (b) has given a buy signal (b), although it is still negative. Also notice the A/D and the CMF lines indicate a big move into the dollar. This is either short covering (fairly likely at this part of the cycle) or new purchasers.
Thursday, October 28, 2010
Durable Goods/Case Shiller and Initial Unemployment Claims
The year over year rate of change is still positive. However, the pace of the increase is slowing, indicating that the rate of improvement is decreasing.
The month to month rate of increase shows the decrease in the pace of improvement.
Durable goods:
First, let's take a look at the headline chart -- that is, the chart that shows the total number.
The month to month rate of change among the cities shows most demonstrated a decrease last month.The big issue in the existing home market is a massive inventory overhang. Excess inventory = decreasing prices. I wouldn't expect this situation to change in the near future.
For durable goods, let's start with the headline number and chart:
This is a positive chart, as it shows a continued improvement in durable goods orders. However, the devil is in the details. The the biggest "problem" with these numbers is the skewing effect of aircraft orders. So let's look inside the report
Click for a larger image.
New orders without transportation orders (which are 27.5% of all durable goods orders) dropped .8% last month, and has dropped two of the last three months. However, let's look at some of the other parts of the report.
Machinery orders increased 2% last month and have increased 2 of the last three months.
Computers orders increased, but communications equipment decreased sharply. However, communications equipment has increased strongly the preceding two months, so a drop off is not out of line.
In short, the insides of this report is "fair," because it indicates there is still some retooling going on. However, ideally we'd like to see more strength.
Initial Claims:
Claims data offer rare good news on the labor market as initial claims fell steeply to 434,000 in an October 23 week that isn't skewed by special factors. The level is the lowest since July as is the four-week average of 453,250. Given that July's data were distorted by adjustment problems tied to auto retooling, the latest batch of data is perhaps the best so far of the recovery.
This drop in initial claims is welcome news, as it gets us below the 450,000. However, we need this trend to continue for several weeks, and we need this number to more to the 400,000 area and stay there.
The sum total of all this information is clear: the economy is still slow; housing is facing a massive inventory overhang that will prevent price appreciation for some time. The retooling that we saw earlier in the recovery is slowing. However, the employment situation is marginally better. There is nothing to indicate the economy is going to move quickly into a stronger recovery, but there is nothing to indicate an impending crash either.
More Evidence of Increased Pressure on Food Prices
From the WSJ:
Over the next decade, China's annual grain demand is likely to reach 573 million tons, which is above its current production levels. With marginal increases in crop yield shrinking and arable land harder to find, the bet is on that Beijing may swiftly become more reliant than ever on global markets for an essential class of commodities it is desperate to keep mostly home-grown.
.....Inside China, this has already gone from just bourse play to a matter of public interest. In October, the price of staples like cooking oil and sugar sold in China's supermarkets jumped 10% to 13%. News of food shortages—in corn, wheat, garlic, mung bean, and sugar—have dominated local headlines this year.
Food is a political hot potato, and sharply higher prices in a short space of time can stoke public anger, encourage smuggling, and threaten to up-end China's cherished standard of 95% self-sufficiency in food. Food accounts for a third of the basket of goods used to calculate inflation.
Russia has warned that the extreme drought that ruined its grain crop this year has impeded planting of winter grain, raising fears of another poor harvest in 2011.Elena Skyrnnik, Russian agriculture minister, said on Wednesday that Russia’s farmers were expected to plant about 15.5m hectares of winter grain crops this year, down from an earlier forecast of 18m hectares. Wheat usually accounts for about 85 per cent of total area of winter grain planting in Russia.
.....
Ms Skrynnik said planting of 15.5m hectares would allow for a 40m tonne crop of winter grain in 2011. Last year Russian farmers planted just under 18m hectares of winter grains before the crop was ravaged by drought.
But analysts were sceptical of the minister’s forecast, warning that delays to planting as farmers waited for signs of rain would put winter wheat seedlings at higher risk of failing.
“The government’s forecasts are over-optimistic,” said Andrey Sizov, the managing director of SovEcon, the Moscow-based agriculture consultancy.
The price of sugar is likely to surge to a 30-year high in the coming months, the top traders of the sweetener believe, as the world awaits fresh supplies from India......
The commodity has had a roller-coaster 12 months, plunging from 30 cents a pound to 13 cents in a few months this year. But now it is once again near a 30-year high and this time some traders are even more bullish than last year.
The crucial issue for the global sugar market, just as 12 months ago, is India. But the tables have turned: whereas last year traders were forecasting a poor crop in the country, the world’s largest consumer, now they are looking to India to fill a shortfall in global supplies.
.....
At the same time, there are growing expectations that the harvest in Brazil, which accounts for more than half of world exports, may fall for the first time in years in 2011 as farmers are forced to renovate their ageing sugar cane plantations. In addition, Brazil has used up the stock of cane that it usually carries forward from one harvest to the next, increasing the chance that production will be lower next year.
A closer look at Withholding tax receipts
- by New Deal democrat
About a year ago I started keeping track of withholding tax receipts. which are reported daily by the Treasury Department. Doomers were sure that these receipts, which were still running negative YoY, spelled, well, Doom, but I was confident that the trend was bottoming and would reverse until it became positive - which is exactly what happened. Along the way, I've become convinced they are an excellent way of a real-time look at employment, since they are the total of taxes withheld by millions of actual jobholders. You don't pay withholding taxes if you don't have a job!
Matt Trivisonno also looks at this data, although he uses a slightly different metric. He also includes several helpful graphs (delayed 3 months for the public) that demonstrate just how useful measuring daily withholding tax data can be. (BTW, Matt's blog is a great source of technical analysis and populist-themed economic commentary). Let's compare the following two graphs. The first is from Matt Trivisonno's blog. It shows the past 12 months' vs. the 12 months previous for tax withholding as a YoY percentage for the last 10 years:
Compare that with this graph of YoY% job growth (red) and aggregate hours in private industry (blue) for the last 10 years:
The shape of the graphs is virtually identical. Only the scale of the YoY percentages is different. (Aggregate hours changes at about 1/3 the rate of tax withholding, and payrolls by about 1/4 the rate). It seems clear that comparing the sum of the the entire last 12 months of tax withholding is directly comparable in direction and rate of change to the YoY change in jobs.
Another source making use of withholding tax data is the paid subsription service TrimTabs. In the past I have pilloried TrimTabs for its method of looking at the economy, which is to look at the entire last 12 months of payroll withholding taxes, compare it with the entire 12 months previous to that, and project that trend forward for the economy as a whole. It caused them to make one of the worst calls ever when they used the metric to declare the incipient little recession "over" in April 2008!
As bad as that analysis was, though, with regard to the specific bailiwick of job creation and destruction, TrimTabs' approach of using withholding taxes to estimate payrolls has been thoroughly vindicated by the Great Recession. Bonddad frequently points out that the birth/death model used by the BLS has been widely accepted by the academic community, and makes inherent theoretical sense, given their methodology of calling businesses to see if they hired or fired within the last month. At the same time, the BLS itself acknowledged in February, as it deducted nearly a million more jobs from its data for the period of March 2008-March 2009, that its birth/death metric had proven to be not properly calibrated for a decline of this magnitude, and was the primary reason for the revision. In fact, TrimTabs monthly payrolls report has proven to be much more accurate during the Great Recession than has the unmodified BLS report. Here is a chart demonstrating that fact through the end of 2009:
Month over month vs. Year over year
One problem with using 12 month sums vs. previous 12 month sums is that it lags terribly when signalling a change in trend. Ideally we would simply measure month over month. But tax withholding is seasonal. Generally May through November are "low tide" while December through March are "high tide" and April is transitional. Thus raw month over month comparisons may not be too helpful.
One way around this is to measure the YoY% change in monthly increments. This signals changes in trend early (as it did beginning a year ago). Measuring taxes withheld in any given month makes intuitive sense as well (if you have 10% more in taxes paid this year than last year during the same month, that suggests payment has gone up ~10% which after adjusting for inflation, ought to render X% more employees paying those additional taxes).
But in the last few months we have had some excellent YoY comparisons with some poor BLS (and TrimTabs - more below) results. Here is a table showing that result, by month, since April of this year, when the YoY% comparison turned positive:
At my request, to see if a comprehensive data set would make a significant difference, Rebecca Wilder of the Angry Bear blog earlier this week published the withholding tax YoY% change for a rolling 30 day period, and it shows a similar result, of comparative gains up to about 10% punctuated by several air pockets during the summer:
The comprehensive result is in accord with the table above. YoY monthly receipts turned postive in March, and have been positive with two notable potholes (roughly the end of May and the end of July) since then.
Despite the above, every number including census workers since June has been negative. Last month even payrolls exluding census were negative. So the method of simply comparing Month A receipts now vs. one year ago has its drawbacks.
The problem, it appears, lays with using the "first derivative." Suppose the underlying number for consecutive months A and B last year were flat. If this year, month A is up 4% and month B is up 6%, those should translate into actual gains. But suppose instead last year's month B was 10% below month A. Then the same YoY% increase from month A to B still yields a decline in jobs in month B compared with month A - although it would still seem to suggest that both months should be above their respective months last year on a YoY basis. In fact both the BLS and Household Surveys showed YoY jobs to have turned positive in July, even though tax withholding went positive first in April.
Nevertheless, it is clear that YoY monthly increases do signal a change in trend. Here is a continuation of the graph of TrimTabs monthly job estimates vs. the BLS Nonfarm Payrolls numbers for this year so far (with the monthly YoY% increase included as well). TrimTabs turned positive only in March, but since then has been generally yielded higher job numbers than has the BLS:
If the YoY% increases by month persist (not guaranteed), it certainly seems that we should be up 1% or more jobs YoY by next spring. In any event, since March the Withholding tax approach has yielded a slightly more bullish result than the BLS' method. So far, October is running more than 5% ahead of last year. Once TrimTabs comes out with their estimate for this month's payrolls, I'll report it here.
About a year ago I started keeping track of withholding tax receipts. which are reported daily by the Treasury Department. Doomers were sure that these receipts, which were still running negative YoY, spelled, well, Doom, but I was confident that the trend was bottoming and would reverse until it became positive - which is exactly what happened. Along the way, I've become convinced they are an excellent way of a real-time look at employment, since they are the total of taxes withheld by millions of actual jobholders. You don't pay withholding taxes if you don't have a job!
Matt Trivisonno also looks at this data, although he uses a slightly different metric. He also includes several helpful graphs (delayed 3 months for the public) that demonstrate just how useful measuring daily withholding tax data can be. (BTW, Matt's blog is a great source of technical analysis and populist-themed economic commentary). Let's compare the following two graphs. The first is from Matt Trivisonno's blog. It shows the past 12 months' vs. the 12 months previous for tax withholding as a YoY percentage for the last 10 years:
Compare that with this graph of YoY% job growth (red) and aggregate hours in private industry (blue) for the last 10 years:
The shape of the graphs is virtually identical. Only the scale of the YoY percentages is different. (Aggregate hours changes at about 1/3 the rate of tax withholding, and payrolls by about 1/4 the rate). It seems clear that comparing the sum of the the entire last 12 months of tax withholding is directly comparable in direction and rate of change to the YoY change in jobs.
Another source making use of withholding tax data is the paid subsription service TrimTabs. In the past I have pilloried TrimTabs for its method of looking at the economy, which is to look at the entire last 12 months of payroll withholding taxes, compare it with the entire 12 months previous to that, and project that trend forward for the economy as a whole. It caused them to make one of the worst calls ever when they used the metric to declare the incipient little recession "over" in April 2008!
As bad as that analysis was, though, with regard to the specific bailiwick of job creation and destruction, TrimTabs' approach of using withholding taxes to estimate payrolls has been thoroughly vindicated by the Great Recession. Bonddad frequently points out that the birth/death model used by the BLS has been widely accepted by the academic community, and makes inherent theoretical sense, given their methodology of calling businesses to see if they hired or fired within the last month. At the same time, the BLS itself acknowledged in February, as it deducted nearly a million more jobs from its data for the period of March 2008-March 2009, that its birth/death metric had proven to be not properly calibrated for a decline of this magnitude, and was the primary reason for the revision. In fact, TrimTabs monthly payrolls report has proven to be much more accurate during the Great Recession than has the unmodified BLS report. Here is a chart demonstrating that fact through the end of 2009:
Month over month vs. Year over year
One problem with using 12 month sums vs. previous 12 month sums is that it lags terribly when signalling a change in trend. Ideally we would simply measure month over month. But tax withholding is seasonal. Generally May through November are "low tide" while December through March are "high tide" and April is transitional. Thus raw month over month comparisons may not be too helpful.
One way around this is to measure the YoY% change in monthly increments. This signals changes in trend early (as it did beginning a year ago). Measuring taxes withheld in any given month makes intuitive sense as well (if you have 10% more in taxes paid this year than last year during the same month, that suggests payment has gone up ~10% which after adjusting for inflation, ought to render X% more employees paying those additional taxes).
But in the last few months we have had some excellent YoY comparisons with some poor BLS (and TrimTabs - more below) results. Here is a table showing that result, by month, since April of this year, when the YoY% comparison turned positive:
| Month | 2009 Withholding receipts | 2010 Withholding receipts | YoY% change |
|---|---|---|---|
| April | 133.2 | 139.4 | +4.7% |
| May | 126.0 | 126.8 | +0.6% |
| June | 133.8 | 144.4 | +7.9% |
| July | 131.4 | 131.2 | -0.2% |
| August | 126.4 | 135.5 | +7.2% |
| September | 125.2 | 132.1 | +5.5% |
| October | 124.7 | ??? | |
| November | 127.7 | ??? |
At my request, to see if a comprehensive data set would make a significant difference, Rebecca Wilder of the Angry Bear blog earlier this week published the withholding tax YoY% change for a rolling 30 day period, and it shows a similar result, of comparative gains up to about 10% punctuated by several air pockets during the summer:
The comprehensive result is in accord with the table above. YoY monthly receipts turned postive in March, and have been positive with two notable potholes (roughly the end of May and the end of July) since then.
Despite the above, every number including census workers since June has been negative. Last month even payrolls exluding census were negative. So the method of simply comparing Month A receipts now vs. one year ago has its drawbacks.
The problem, it appears, lays with using the "first derivative." Suppose the underlying number for consecutive months A and B last year were flat. If this year, month A is up 4% and month B is up 6%, those should translate into actual gains. But suppose instead last year's month B was 10% below month A. Then the same YoY% increase from month A to B still yields a decline in jobs in month B compared with month A - although it would still seem to suggest that both months should be above their respective months last year on a YoY basis. In fact both the BLS and Household Surveys showed YoY jobs to have turned positive in July, even though tax withholding went positive first in April.
Nevertheless, it is clear that YoY monthly increases do signal a change in trend. Here is a continuation of the graph of TrimTabs monthly job estimates vs. the BLS Nonfarm Payrolls numbers for this year so far (with the monthly YoY% increase included as well). TrimTabs turned positive only in March, but since then has been generally yielded higher job numbers than has the BLS:
| Month | TrimTabs estimate | BLS Nonfarm Payrolls | YoY% change |
|---|---|---|---|
| January | -104 | +14 | -6.7% |
| February | -40 | +39 | -2.3% |
| March | +280 | +208 | +5.7% |
| April | +262 | +313 | +4.7% |
| May | +475 | +432 | +0.6% |
| June | -152 | -175 | +7.9% |
| July | -5 | -66 | -0.2% |
| August | -65 | -57 | +7.2% |
| September | -65 | -95 | +5.5% |
| October | ??? | ??? | |
| November | ??? | ??? |
If the YoY% increases by month persist (not guaranteed), it certainly seems that we should be up 1% or more jobs YoY by next spring. In any event, since March the Withholding tax approach has yielded a slightly more bullish result than the BLS' method. So far, October is running more than 5% ahead of last year. Once TrimTabs comes out with their estimate for this month's payrolls, I'll report it here.
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