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This is an update to a post I did several years ago.

September 23, 2011
An Employment Trend that Has Not Failed





In hindsight, it has not been easy.

The following chart shows the natural log of financial activities employment divided by manufacturing employment. When using logs, constant exponential growth is seen as a straight line.


Click to enlarge.

This trend is in serious danger of failing. We're at the very bottom of the channel again. We last saw this heading into the dotcom bust. Before that we were heading into several recessions in the late 1970s. We also saw it as we were putting a man on the moon in 1969. Have we colonized the moon yet thanks to our ever growing prosperity? Or are we planning to put that off a few more years?

Do not lose hope. When Mr. FIRE Economy was asked about his recent under-performance relative to manufacturing (relative to the long-term trend) he exclaimed, "Give me recession or give me death!" To which Mr. Manufacturing Economy laughed with great hubris, "Don't be silly! Our new and improved Fed has permanently put an end to all recessions! It's common knowledge. Everyone knows it. It really is different this time!"

In all seriousness, note that the ratio tends to rise most during recessions as manufacturing employment plummets more than financial activities employment. Being at the very bottom of the channel therefore puts us in "great" position for another legendary rise in the ratio. If the trend holds over the long-term (think fully automated manufacturing employment), then it is only a matter of time.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

The following chart shows the average of new private housing units authorized by building permits and new privately owned housing units started.


Click to enlarge.

If cold weather is responsible for the exponential trend failure then, as seen in the chart, it sure has been cold over the past year.

Source Data:
St. Louis Fed: Custom Chart

The following chart shows real GDP.


Click to enlarge.

Four exponential trend lines and their growth rates have been added.

Note that each time an exponential trend fails, it is replaced with an exponential trend of lesser quality. What doesn't kill us, doesn't make us stronger. Go figure.

The next chart shows the long-term trend of those growth rates. I'm using the midpoint of my hand-picked expansions as the x-axis.


Click to enlarge.

The most recent data point is open to serious revision. The growth rate probably won't change much, but the x-axis position may (it could move to the right on the chart). It really comes down to how long this expansion lasts.

Real yields have fallen because real GDP growth has fallen (and continues to fall). It really is just that simple. Put another way, it is becoming harder and harder to make money off of money (current lofty stock market valuations notwithstanding).

Those hoping for a return to normal better hope that the downward trend does not continue, because that's about the only normal thing going on right now.

The future's so bright I gotta werewolves.



See Also:
The Long-Term Death of Real Yields

Source Data:
St. Louis Fed: Real GDP

The following chart shows the US trade deficit with China divided by the price of crude oil (annualized billions of barrels).


Click to enlarge.

It shows the amount of oil China could buy if they were to use their entire trade surplus with us to do so. That's assuming the price of oil would not be driven even higher in response to increased purchases of course, which is no doubt a bad assumption.

The next chart plots the natural log so that constant exponential growth can be seen as a straight line.


Click to enlarge.

China "sent" us ever increasing amounts of stuff that we want, yet we do not seem to be returning the favor by sending them ever increasing amounts of the stuff that they want (barrels of oil). Note that I used "sent" instead of "sends." The next chart explains why. It shows the annual growth rate of imports from China.


Click to enlarge.

As seen in the chart, the nominal growth rate is just about dead now. The growth rate in the middle of the channel is roughly 0%, which oddly enough is what the Fed feels short-term interest rates should be over an "extended period."

ZIRP-a-Dee-Doo-Dah


For what it is worth, I am not even remotely bullish on China (nor have I been since starting this blog in 2007). I also don't believe that I will ever feel the need to bribe a border guard to let me on the last plane to China. You know, as a desperate attempt to protect my future standard of living and freedoms (Patriot Act notwithstanding). Sigh.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2
St. Louis Fed: Custom Chart #3

Click to enlarge.

The line in black shows real net corporate dividends.

The line in blue shows the real trade deficit (same scale).

The red line shows the exponential trend in real dividends from 1947:Q1 to 1987:Q1. Note the exponential trend failure (to the upside).

Will real dividends stay permanently elevated? Will profit margins stay permanently elevated? Can we be assured that the worst is behind us? Can we expect future growth in real dividends to match the growth we've seen since the early 1990s? I wouldn't answer a resounding yes to any of those questions. Call me skeptical, to put it mildly. Instead, I would ask the following question.


Put another way, it really helped the corporate bottom line to transition from "Made in USA" to "Made in ____." Mission accomplished. Now what? Persistently high oil prices (financial meltdowns notwithstanding)? Persistently stagnant wage growth? Persistently high unemployment? Increased rate of US (and/or global) financial meltdowns? In and out of ZIRP from here on out (if ever out)? Even more giant sucking sounds?

February 13, 2014
China auto market growth slows sharply in January



Other than corporate executives wishing to boost the value of their net worth and retire before the @#$% really hit(s) the fan, did anyone in power really think this through?

The Chinese drive more. We drive less out of necessity (as seen in annual vehicle miles traveled per capita that fell apart during the Great Recession and has yet to make any sort of recovery). That's our plan for a more prosperous America? Seriously?

Source Data:
St. Louis Fed: Custom Chart

Click to enlarge.

I'm using quarterly averages to eliminate some of the noise.

Source Data:
St. Louis Fed: Existing Home Sales

The following chart shows the real home equity loans at all commercial banks per civilian employed (December 2013 dollars).


Click to enlarge.

A linear trend failure *and* an exponential trend failure? All in the same chart? I think I just died and went to trend failure heaven!

October 27, 2005
Bernanke: There's No Housing Bubble to Go Bust


Wikipedia: Good cop/bad cop


If credit is the lifeblood of this economy, then we just need to work through this "soft patch" and all will be well again. Right?

Investopedia: Soft Patch


Two quick questions and I'll let you go.

1. Where the @#$% is the good Fed?
2. Is it normal for a soft patch to last more than 5 years?

Source Data:
St. Louis Fed: Custom Chart

Click to enlarge.

Real GDP growth averaged 3.48% per year from 1947 to 2000.

Starting in 2000, this long-term exponential trend began to fail. First the dotcom bubble popped, then came the housing bust. Let's take a close-up look at the most recent recovery for any signs of hope.


Click to enlarge.

From the bottom of the Great Recession, real GDP growth has averaged just 2.28%. That is an especially pathetic growth rate for at least five reasons.

1. "The worse a situation becomes the less it takes to turn it around, the bigger the upside." - George Soros (I think we can all agree that the situation qualified as much worse. So where is the bigger upside in response?)

2. The growth rate is a full 1.2% lower than the long-term average heading into 2000. This pig desperately needs lipstick in my opinion.

3. We can't blame any recessions for it being this low. There haven't been any recessions since the bottom! This data has been cherry picked to be recession free. Duh! I threw the optimists a bone here and it still came up way short! Seriously.

4. We're currently following the exponential growth trend line with great precision (r-squared = 0.988). The last time it failed, it failed to the downside. Historically speaking, recessions tend to do that. I know. Shocking.

5. How much will the 2.28% average drop once the next recession hits? In other words, what will the true growth rate be over a complete business cycle? 3.48%? I doubt it with every fiber of my being. I'd even be willing to leverage up that fiber with Super Colon Blow!

The January 20th cover of Time Magazine calls Janet Yellen the sixteen trillion dollar woman. That's a pretty amazing title and her picture definitely inspires confidence. She's going to need to work some magic to restore prosperity over the full business cycle though. I therefore offer her a musical tribute to help inspire. The monumental task before her is legendary.




I can't speak for you, but I've got a really good feeling about this. Yes, very positive. Haven't been this optimistic in years. Why you ask? Her picture on the cover of Time is on a pitch black background ("over blackened plains she will find her way"). What could possibly go wrong?

See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Real GDP