Alikhver Data Insights

06/10/2023

Is a Banking Crisis on the Horizon?

Banking, as the lifeblood of an economy, is often at the heart of economic uncertainties. One such question that arises in recent times is, “Are we heading towards a banking crisis?” Let’s delve into this, breaking down the complex financial jargon into digestible information.

The current conditions suggest a positive trend – bank funding conditions have been showing signs of improvement over the past weeks. To understand this, we need to look at various elements in the banking system.

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Banking, as the lifeblood of an economy, is often at the heart of economic uncertainties. One such question that arises in recent times is, “Are we heading towards a banking crisis?” Let’s delve into this, breaking down the complex financial jargon into digestible information. The current cond...

06/10/2023

06/10/2023

06/09/2023

Wage growth too high across DW countries to durably bring down inflation.

In credit cycles wages lag everything, but in inflationary income-driven cycles, wage growth is coincident by maintaining spending and inflation.

Recent Atlanta Fed data confirms elevated US wage growth (Diagram 1). Wage growth has to be put in the context of overall productivity to understand the impact on inflation. That's because the imbalance between paid nominal wages (how fast spending power is rising) and productivity growth (how much production growth is rising) drives inflation. In the US context, structural productivity has been quite low in the post GFC period, running at roughly 1% over the last 15yrs. That’s quite low relative to wage growth of 6%, leaving a lot of inflationary pressure (Diagram 2). And more recent measures have been even weaker this cycle. Now running negative over the last year and quarter (Diagram 3).

The dynamic is not just occurring in the US, we see it playing out across much of the developed world. European wage growth is running 5-6pct and still rising (Diagram 4). UK wage growth is rising at a 6pct pace over the last year as well (Diagram 5). While expectations are for that to slow a bit over the next year, wage growth of 5-6pct is still going to put substantial pressure on inflation (Diagram 6). Wage pressures are also picking up in Australia, though its been slower moving so far than many other DW economies (Diagram 7). But pressure is clearly for wages to rise further. Minimum wages (which cover a big share of workers) rising nearly 6pct shortly. From Bloomberg: “Australia’s industrial relations umpire on Friday raised the national minimum wage by 5.75%, effective July 1, for about one-in-five workers.” The trend is also clear in Canada where average hourly wage growth has been trending up and is running at 5-6pct of late (Diagram 8).

As we scan across the DW it's increasingly clear that wage growth remains too elevated relative to productivity growth to ease pressures on inflation. And with unemployment rates in these economies at or near secular lows, it is unlikely this pressure will moderate quickly. It is going to take a considerable loosening of labor markets to durably bring wage growth down and eventually ease inflation pressures. A lot more work to do for all these central banks.

06/08/2023

A bit on the labor market and a recession:

After this morning's surprise in Jobless Claims (+24k above consensus), we have to note that the labor market is cooling faster than anticipated. This is further evident by yesterday's Kansas City Fed Labor Market Indicator which declined for its seventh consecutive month. This just shows the Jobs number from last week is a joke. People are taking in multiple jobs and it's skewing that report. (Diagrams 1 and 2).

The last report only showed signs of strength in three groups. Gov, Edu/Health, and Mining. With Gov constrained by the new 1% spending cap I imagine that will weaken further. Mining is small. So basically, Health and Education... (Diagrams 3-5).

So, let’s look at the business cycle: should we use the unemployment rate, the household survey, the establishment survey, or what? Perhaps all... my Coincident Employment Index aggregates five of these labor market metrics (Diagram 6).

The composite labor market index was rising sharply in 2021 but has flattened out. If we look at the growth rate, we can see that the Coincident Employment Index is growing at a 0.7% annualized rate (Diagram 7). A longer-term chart shows that a negative growth rate for the Coincident Employment Index is a recession 100% of the time with zero false flags. This makes sense because the components are the broadest measures of labor, and when growth is negative, that's a recession. Objectively, the labor market is dangerously close to contraction. Aggregate hours are starting to decline, and the unemployment rate no longer falling has pulled the index down. It should be noted that recessions often begin before labor turns negative (lagging indicator) (Diagram 8 ).

We can use the same process for leading indicators of employment, such as hours worked and initial jobless claims to show the business cycle progression of the labor market (Diagram 9). I use this basket approach for many sectors of the economy. This chart marks periods when the Cyclical, Employment and Aggregate Coincident Indexes are all below 1.5%. Add it to the list of "this time may be different." (Diagram 10). Turning points in the business cycle, as the NBER tells us, should satisfy three conditions: depth, duration and diffusion.

“The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable.”

In other words, what's the magnitude of the change, length of the change and breadth of the change?

Sticking with labor, let's look at continued claims: continued jobless claims are 28% higher than a year ago, a level not seen outside of recessions. Some people argue that 2022 was an outlier, so we shouldn't compare it against that year. This chart shows the 2023 level of claims vs. 2022, 2019, and 2018 (Diagram 11). So, the level of NSA continued claims is rising above the average of (2022, 2019 and 2018) or the average of just (2019 and 2018).

What's the magnitude? Claims today are about 10% higher than the more objective baseline level, which is normally on par with recession starts (Diagram 12).

How widespread? We can see that 33% of states are showing a level of continued claims more than 10% higher than the 2022, 2019 and 2018 baseline. Look at the inflection around March (Diagram 13).

There has been a clear inflection in the labor market when taking a three-dimensional view of a basket of composite indicators. Obviously, this can't be seen through one headline number.

Let me know where you disagree and share if you agree.

06/08/2023

The U.S housing market is in the middle of its sixth major downturn since the late 1960s.

Home prices are declining in 75 percent of major cities, with many areas posting declines for six or seven consecutive months. The most time-tested and reliable measure of home prices is the Case-Shiller home price index. The Case-Shiller home price index tells us that home prices at the national level have started to decline, with a peak in the summer of 2022. Home prices don't normally decline in nominal terms (See Diagram 1).

DEPTH of the downturn

This chart (See Diagram 2) shows that in the last 30 years, home prices have only declined three times: there was a two percent decline in the 1990 recession, and nearly a thirty percent decline around the 2008 recession. Home prices didn't drop at all in the 2001 recession. Home prices today have declined about three percent nationally from the peak in the summer of 2022, but as we know, real estate is regional- some areas have declined more than three percent and some areas are still closer to their peak levels.

But how does this housing downturn compare to a longer history? If we want to compare housing cycles across a longer period of time, we have to look at home prices in real terms or adjusted for inflation. (See Diagram 3) There are a few reasons why looking at real or inflation-adjusted home prices is appropriate. Housing is very important for the wealth effect- when home prices rise, people feel wealthier and it is very common to refinance and pull equity out of a property to use on consumption or more real estate assets. This only works if the home price is rising in real terms, or else the cash that you pull out of the home can't support the consumption of other goods that are rising even faster in price. During periods of high inflation like the 1970s, home prices may rise in nominal terms, but fall sharply in real terms.

When we look at real home prices, we can see that prices generally decline around recessions. (See Diagram 4) This makes sense- the duration of the correction and the magnitude of the corrections vary, but they are generally centered around recessionary periods.

DURATION of the downturn

The other important point is that home prices tend to bottom out at the end of a recession or after a recession. (See Diagram 5) Home prices are a slow-moving lagging indicator with a full housing cycle often taking three to five years, so in the six major housing downturns (including the extreme 2008 scenario and the no decline 2000 scenario), the average recession brings a real home price decline of roughly 12 percent with declines that last for 37 months. Currently, home prices have declined for six consecutive months and are about six percent from the peak. The economic downturn and most of the recession are still in front of us, so declines will likely continue and reach at least the historical averages. Leading indicators of real home price growth are still moving to the downside.

There is no debate that the market hit a clear peak in 2022 and the broad national momentum remains to the downside. Thoughts?