The Farce Is Strong with this Fed Chair

The dot-com boom went bust… the housing boom went bust… now we have the Fed boom.

These booms are all identical in that they were all founded on an irrationally exuberant belief in some fundamental story that, eventually, gives way to the cold hard truth of reality.

The Fed boom farce is founded on a belief that the “masters of the universe” at the Fed can, from the comfort of their FOMC meeting room in Washington DC, not just plan the most fundamental trends in our massive macro-economy (namely prices and employment) but also manage to erase all the errors accumulated by millions of foolish and fraudulent participants (households and firms) during past economic tumult.

One very problematic way that this boom is different though is that it’s not a belief in a single industry sector or a particular asset class but in the institution that many believe currently backstops the entire system itself.

When the trends turn on this boom… look out!

So, that begs the question… Does Janet Yellen, a frail diminutive academic, have what it takes to meet the demands of the ensuing crisis?

I think not...

The Fed is going to need a new Chairman.

Employment Situation: Nonfarm Payrolls and Civilian Unemployment December 2015

Today's Employment Situation Report indicated that in December, net non-farm payrolls increased by a by a notable 292,000 jobs overall with the private non-farm payrolls sub-component adding 275,000 jobs while the civilian unemployment went flat at 5.0% over the same period.

Net private sector jobs increased 0.23% since last month climbing 2.15% above the level seen a year ago and climbing 4.54% above the peak level of employment seen in December 2007 prior to the Great Recession.

Employment Situation: Unemployment Duration December 2015

Today's employment situation report showed that conditions for the long term unemployed generally went flat in December.

Workers unemployed 27 weeks or more increased to 2.085 million or 26.3% of all unemployed workers while the median term of unemployment declined to 10.5 weeks and the average stay on unemployment declined to 27.6 weeks.

Employment Situation: Total Unemployment December 2015

Today's Employment Situation report showed that in December “total unemployment” including all marginally attached workers went flat at 9.9% while the traditionally reported unemployment rate also remained unchanged at 5.0%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition of “unemployed” (essentially unemployed and currently looking for full time employment) leaving many workers to be considered effectively “on the margin” either employed in part time work when full time is preferred or simply unemployed and no longer looking for work.

The Bureau of Labor Statistics considers “marginally attached” workers (including discouraged workers) and persons who have settled for part time employment to be “underutilized” labor.

The broadest view of unemployment would include both traditionally unemployed workers and all other underutilized workers.

To calculate the “total” rate of unemployment we would simply use this larger group rather than the smaller and more restrictive “unemployed” group used in the traditional unemployment rate calculation.

Weekly Unemployment Claims: Initial and Continued January 07 2015

Today’s jobless claims report showed a decline to initial unemployment claims as well as an increase to continued unemployment claims as seasonally adjusted initial claims remained just below the 300K level.

Seasonally adjusted “initial” unemployment claims declined by 10,000 to 277,000 claims while seasonally adjusted “insured” claims increased by 25,000 to 2.230 million resulting in an “insured” unemployment rate of 1.6%.

The Fed's Unraveling: Fisher's Reverse Wimpy Factor

While it should come as no surprise that former Federal Reserve Bank President (and former voting member of the FOMC) Richard Fisher speaks directly about Fed activities and his dissent of the committee's support of QE3, the level of candor of yesterday's CNBC interview appears pretty shocking.

Given that one of the main accomplishments outlined by former Federal Reserve Chair Ben Benrnanke was the creating of a "wealth effect" by working to boost the stock market, Fisher's assertion that market is now due for a correction appears to indicate that he has completely broken ranks and further, is looking to distance himself from the Fed policy decisions made during the Great Recession.

The below video quality is very poor but well worth the watch given that the clip currently posted at CNBC edited out most of the interesting commentary.

ISM Non-Manufacturing Report on Business: December 2015

Today, the Institute for Supply Management released their latest Non-Manufacturing Report on Business indicating that service related business activity slowed slightly in December with the overall non-manufacturing index falling to 55.3 from last months reading of 55.9.

At 58.7 the business activity index improved since last month but rose just a slight 0.170% above the level seen a year earlier.

Overall, respondent sentiment indicated strength with the service sector clearly continuing to expand with improving employment, orders and general activity.

ADP Manufacturing Meltdown

Looking a bit deeper at today's ADP Employment Report, one finds yet another clear signal that the current expansion has topped-out making recession as a distinct possibility in 2016.

The ADP Total Manufacturing Payrolls series has turned negative dropping 0.09% on an annual basis, the first year-over-year decline since the waning days of the Great Recession in 2010.

Keep in mind that while manufacturing is clearly also showing strong secular weakness, this is a very sensitive series that should not be ignored.

Also, a revitalization of the nation's manufacturing sector was a important goal of the current administration's economic policy and a particularly key focus of 2009's American Recovery and Reinvestment Act.

ADP National Employment Report: December 2015

Today, private staffing and business services firm ADP released the latest installment of their National Employment Report indicating that the situation for private employment in the U.S. improved in December as private employers added 257,000 jobs in the month bringing the total employment level 2.04% above the level seen in December 2014.

Look for Friday’s BLS Employment Situation Report to likely show, more or less, similar trends.

Recession Watch: Chauvet-Piger and Term Spread Probabilities January 2015

For forecasting oncoming recession, from a purely statistical standpoint, we have two interesting data series to follow, the Chauvet-Piger Recession Probabilities and the Term Spread Probability of Recession

In the latest release of the Chauvet-Piger Recession Probability indicates that the probability of recession has increased to 0.78% currently indicating minimal risk of looming recession.

In 2008, Marcelle Chauvet of the University of California and Jeremy Piger of the University of Oregon published a paper titled “A Comparison of the Real-Time Performance of Business Cycle Dating Methods” which outlined two novel statistical methods (most notably the markov-switching method) for distilling recessionary turning points out of the very same macro data series that the NBER uses to make it’s cycle assessments.

As for the Term-Spread Probability of Recession, the latest data indicates that the probability for recession appears to be on the rise with late 2016 probability (the probability that there will be a recession by that date) of 3.56%.

Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.

Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.

The Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey: December 2015

Recently, the Federal Reserve Bank of Dallas released their latest read on manufacturing in their region indicating that manufacturing activity worsened significantly with the current general business activity index declining to a strong contraction level of -20.1 while the future general business activity index declined to -1.4.

These results are an indication (consistent with other regional and national manufacturing activity data-points) that the U.S. manufacturing sector has slumped into recessionary levels as of late and provides yet another likely harbinger of what is to come in 2016 for the general economy.

ISM Manufacturing Report on Business: December 2015

Today, the Institute for Supply Management released their latest Report on Business for the manufacturing sector indicating that manufacturing activity weakened in December with nearly all components now indicating contraction.

At 48.2 the purchasing manager’s composite index (PMI) declined 0.82% from November and falling 12.52% below the level seen a year earlier giving a solid indication of contraction for manufacturing.

Further, the Imports Index declined to recessionary levels, Customer Inventories have mounted indicating notable inventory build while the prices index slid to the lowest level since April 2009.

Construction Spending: November 2015

Today, the U.S. Census Bureau released their latest read of construction spending showing improved residential spending but weakening non-residential spending for November with total private construction spending and single family construction spending rising on the month while non-residential construction spending declined.

On a month-to-month basis, total residential construction spending increased 0.3% on the month rising 10.8% above the level seen a year earlier but still remained well below the peak level seen in 2006.

Single family construction spending increased 0.6% on the month rising 9.3% above the level seen a year earlier but still remained well below it's peak level reached in 2006.

Non-residential construction spending declined 0.7% on the month but rose 13.6% above the level seen a year earlier but still remains a well below the peak level reached in October 2008.

The following charts (click for larger dynamic versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year, month-to-month and peak percent change to each since 1994 and 2000 – 2005.

Yellen’s Myth (Part 1)

Notwithstanding Fed Chair Yellen’s certainty about her “myths”, recession indicators are continuing to accumulate as the current U.S. economic expansion continues to clearly trend into its twilight period.

While Yellen is apparently not able to “see anything in the underlying strength of the economy that would lead me to be concerned” about recession, let’s take a look at just a few points of interest that she clearly must have missed.

First, there has been notable protracted weakness in industrial production which is now showing a year-over-year decline of over 1%, a VERY strong indicator of fundamental weakness that is virtually always associated either directly with current or looming recession.


Additionally, both Industrial Production and Capacity Utilization have now show simultaneous notable year-over-year declines, an event that is literally associated with every recession since both data sets have been tracked.


Next, jobless claims appear to have hit the low for this expansion which, as we know from all other past expansions, generally does not stay at this level for very long.

In fact, population adjusted Continued Jobless Claims (continued claims as a percentage of non-institutional population) is at the lowest level since 1969, a strong indicator that insurance claims, and by proxy the general employment situation, has reached its best levels of the expansion.

Weekly Unemployment Claims: Initial and Continued December 31 2015

Today’s jobless claims report showed a notable increase to initial unemployment claims as well as an slight increase to continued unemployment claims as seasonally adjusted initial claims remained just below the 300K level.

Seasonally adjusted “initial” unemployment claims jumped by 20,000 to 287,000 claims while seasonally adjusted “insured” claims increased by 3,000 to 2.198 million resulting in an “insured” unemployment rate of 1.6%.