Broken Velocity: Yellen’s Low Inflation Quandary (Hint: FHFA Home Price Index Growing At 6.62% YoY)

Here is a brief summary of Fed Chair Janet Yellen’s thoughts from yesterday courtesy of Deutsche Bank’s Peter Hooper: The Fed is on track to raise rates once more this year and three times in 2018. Yellen recognized that inflation has been running low recently, and that while there was some uncertainty around this performance, one-off factors that are not expected to persist, and which have not been associated with the performance of the broader economy, have been important. At the same time, Yellen noted that monetary policy operates with a lag and that labor market tightness will eventually push inflation up.

Inflation has been running low “recently”? Actually, “inflation” (defined as core personal consumption expenditure price growth YoY) has been below 2% since April 2012 and below 3% since July 1992. Notice that hourly wage growth for production and nonsupervisory employees has remained low as well, particularly since 2007.

Of course, home price increases have been far greater than the “inflation” rate used by The Fed. The recent FHFA Purchase-only home price index YoY (released this morning for June) has US home prices growing at 6.62% YoY while “inflation” is growing at a palty 1.40% YoY.

But nothing really seems to be working as expected by some. Expanding the M2 Money Supply was supposed to increase Real GDP, but that really hasn’t worked since the Reagan/Clinton recovery when M2 Money Supply growth dropped from over 12.5% YoY in 1983 to 0.1% YoY in April 1995 under President Clinton and Federal Reserve Chair Alan “Maestro” Greenspan. Robert Rubin was the Treasury Secretary.

Notice that M2 Money growth has almost always been higher than real GDP growth since 1995. Hence, M2 Money Velocity has mostly been declining since 1997.

What about the old model where additional Federal debt is okay as long as real GDP growth is greater than Federal debt growth? We are nearly at that point again after decades of rapid Federal debt growth with modest real GDP growth.

I am guessing that rather than raise rates next year, The Fed may be forced to expand their balance sheet … again. Giving more oxygen to the asset bubbles.


As many Americans are forced to switch from exotic beers like Heineken to less expensive beers like Pabst Blue Ribbon. 



Atlanta Fed Increases Q3 Real GDP Forecast To 3.0% As Catastrophe Bonds Plunge (Fed Not Likely To Raise Rates Again Until September 2017 Meeting)

The Atlanta Fed’s GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 3.0 percent on September 8, up from 2.9 percent on September 6. The forecast of the contribution of inventory investment to third-quarter real GDP growth increased from 0.87 percentage points to 0.94 percentage points after this morning’s wholesale trade report from the U.S. Census Bureau.


Of course, these GDP numbers do not yet include the horrific damages caused by Harvey or Irma (while Jose is pushing out into the Atlantic Ocean). The damage to housing, commercial real estate and automobiles from Harvey and Irma will be quite extensive.


Catastrophe (Cat) bonds took a big plunge on Irma.


The extensive hurricane damage is likely to reduce the chance of a Fed rate hike. As of today, the implied probability of a Fed rate hike does not exceed 50% until the September 26, 2018 meeting. And then it is only 55.3%.


The most likely path of Fed rate hikes is beginning to look like the train from the movie “Snowpiercer.”


Be safe Texans and Floridians.


Unit Labor Costs Decline YoY To -0.2% As U-3 Unemployment Hits 4.4% (Phillip’s Milk of Magnesia Curve)

Today, US Unit Labor Costs Nonfarm Business Sector QoQ % SAAR was reported for Q2 FINAL. It declined 0.2% from 0.6% in Q1.

Aren’t we in a supposed tight labor market when wages (and labor costs) should be rising? That is the prediction of The Phillips Curve. But somehow it isn’t happening.

Unit labor costs YoY fell to -0.20% while U-3 unemployment is at 4.4%. This is the “Phillips Milk of Magnesia Curve” because it is giving Fed Chair Janet Yellen and my friend Raphael Bostic (Fed of Atlanta President and CEO) acid indigestion.


With labor costs declining -0.2% YoY and home prices rising 5.65% YoY, Congress we have a problem.


Here is another view of the Phillip’s Milk of Magnesia curve.


Janet Yellen and her bottle of Phillip’s Milk of Magnesia.


Winter Is Coming: August Jobs Report Weak, Average Annual Earnings Growth Remains at 2.5% YoY (U-3 Unemployment Rate BELOW Natural Rate of Unemployment)

August jobs reports are always a little odd. And August 2017 is no different. Only 156K jobs were added in August and the U-3 unemployment rate rose slightly to 4.4%.


Average hourly earnings remained the same at 2.5% YoY.


But the U-3 unemployment rate is once again lower than the NATURAL rate of unemployment and wage growth should be rising, but isn’t.


The Labor Force Participation Rate and Employment to Population Ratio have not been the same since Q3 2007.


Total nonfarm payroll employment increased by 156,000 in August. Job gains occurred in manufacturing, construction, professional and technical services, health care, and mining. Employmentgrowth has averaged 176,000 per month thus far this year, about in line with the average monthly gain of 187,000 in 2016. 

Manufacturing employment rose by 36,000 in August. Job gains occurred in motor vehicles and parts (+14,000), fabricated metal products (+5,000), and computer and electronic products (+4,000). Manufacturing has added 155,000 jobs since a recent employment low in November 2016.

In August, construction employment rose by 28,000, after showing little change over the prior 5 months. Employment among residential specialty trade contractors edged up by 12,000 over the month.

Employment in professional and technical services continued to trend up in August (+22,000) and has grown by 262,000 over the last 12 months. In August, job gains occurred in computer systems design and related services (+8,000).

Health care employment continued on an upward trend over the month (+20,000) and has risen by 328,000 over the year. Employment in hospitals edged up over the month (+6,000).

Mining continued to add jobs in August (+7,000), with all of the growth in support activities for mining. Since a recent low in October 2016, employment in mining has risen by 62,000, or 10 percent.

Employment in food services and drinking places changed little in August (+9,000), following an increase of 53,000 in July. Over the year, the industry has added 283,000 jobs.

Employment in other major industries, including wholesale trade, retail trade, transportation and warehousing, information, financial activities, and government, showed little change over the month.

Notice the big plunge in restaurant staff and bar tenders in August after a surge in July.

jobs by sector Aug 2017_0

Actually, winter for jobs came in 2008 and never quite recovered.


US Second Quarter GDP Revised Sharply Higher To 3.0% (Highest Since Q1 2015), ADP 237K Jobs Added

According to the Bureau of Economic Analysis (BEA), Q2 US Gross Domestic Product rose sharply to 3.0%.

The percent change in real GDP was revised up from the advance estimate, reflecting upward revisions to PCE and to nonresidential fixed investment that were partly offset by a downward revision to state and local government spending.

The biggest surge? Equipment rose 8.8%! For Personal Consumption Expenditures, durable goods rose 5.9% in Q2.

Personal consumption expenditures rose 3.3%, revised upwards from 3.0% in the advanced report.

According to ADP, 237,000 jobs were added in August.



Case-Shiller Home Price Index Rises 5.65% YoY (Wage Growth Only 2.37% YoY), Seattle Highest at 13.4% While Washington DC Lowest at 3.1%

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.8% annual gain in June, up from 5.7% the previous month. The 10-City Composite posted a 4.9% annual increase, down from 5.0% the previous month. The 20-City Composite reported a 5.7% year-over-year gain, the same as the previous month.

Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities. In June, Seattle led the way with a 13.4% year-over-year price increase, followed by Portland with 8.2%, and Dallas with a 7.7% increase. Nine cities reported greater price increases in the year ending June 2017 versus the year ending May 2017.

Once again, the Case-Shiller 20 Metro home price index is rising over twice as fast (2x) as wage growth for the majority of the US population.


Where are home prices rising the most on a YoY basis? Seattle is the only top 20 city growing at more than 10% YoY. In last place is Washington DC. On a MoM basis, Detroit is the leader!


This gives a new meaning to the expression “Take him to Detroit!”

Inventory available to sale continues to deteriorate on a YoY basis. According to Redfin, home sales fell 3.5% in July, the 22nd consecutive month to post an inventory decline.


You have to wonder how much of home price growth is related to The Federal Reserve and its Chair Janet Yellen whipping up prices while wage growth remains less than half and inventory for sale keeps falling.


JC Penney Becomes a Penny Stock On Poor Earnings (Poor Retail Sales and Overbuilding)

Retail anchor tenant JC Penney reported poor earnings last week, sending their stock price below $5. JC Penney is now a penny stock.


But JC Penney is not alone. Other mall anchor tenants such as Sears and Macy’s have plummeted over the past two years as Amazon’s on-line grip takes further hold. I included car rental giant Hertz (blue line) for comparison. They are all a pale image of their former selves in terms of earnings and stock price.


Correspondingly, the CMBS reference indices CMBX BBB S6 and CMBX BB S6 have experienced a bad 2017 and used to be near par back in 2015 as mall delinquencies add up.

In addition to online retailers grabbing business from mall tenants, there is also a massive amount of mall space available after two construction booms. Notice that commercial construction spending peaked after residential construction spending prior to the financial crisis and is outpacing residential construction spending after the crisis.


Retail inventory has boomed since 2002 as vacancy rates remain above 10%.


It’s a retail wasteland. I would say “Won’t Get Fooled Again,” but you know builders will with The Fed keeping rates near zero.

Janet Yellen testifies on Capitol Hill in Washington