. . Laird Research - Economics October 14, 2015 Where we are now ........................ 1 Indicators for US Economy ................... 3 Global Financial Markets .................... 4 US Key Interest Rates ...................... 9 US Inflation ............................. 10 QE Taper Tracker ......................... 11 Exchange Rates .......................... 12 US Banking Indicators ...................... 13 US Employment Indicators ................... 14 US Business Activity Indicators ................ 16 US Consumption Indicators .................. 17 US Housing ............................. 18 Global Business Indicators ................... 20 Canadian Indicators ....................... 23 European Indicators ....................... 25 Chinese Indicators ........................ 27 Global Climate Change ..................... 28 Where we are now Welcome to the Laird Report. We present a selection of economic data from around the world to help figure where we are today. The economy and the stock market are related but certainly not “the same”. Although everything seems to move together these days, its important to step back and consider one of the biggest divergences in the world right now - the stunning recovery of financial markets since the 2008 crisis versus the very slow, plodding recovery of consumers (and I’m in particular looking at the slow recovery of unemployment metrics in the US and the EU). The estimates for US corporate earnings (using the S&P 500 as a proxy) show declining growth rates. Part of this can be blamed on the strengthening US dollar hurting the value of foreign income, but part is due to demand which is currently at low levels and not increasing “fast enough”. Unemployment has been slowly but steadily improving over time, especially in the US, to the point where the past year has seen un- ambiguous improvements in all employment metrics. Initial claims are at historic lows and the unemployment rate is well below fed targets. In the press, there’s a lot of concern over corporate profits stagnat- ing in the US and Canada, but its important to consider how historically high profit margins have become. Those margins can be attributed to very low interest rates, but also to productivity improvements – mea- sured as the amount of output per person. Much of the productivity improvements have stayed on the corporate bottom lines with little trickling down to workers/consumers as higher wages (note: consumers account for over 60% of US GDP). Hourly wages have stagnated for a long time - especially on a real (inflation adjusted) basis. As the US gets close to full employment, there is usally pressure for higher wages, and as talked about in previous reports, some of that is being seen. Here’s one version of the economy’s recent history: businesses needed to tighten their belt and restructure in 2008-2010 to survive, and this hit workers hard due to layoffs. Businesses saw an immedi- ate improvement in bottom lines when the economy stopped shrinking
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....Laird Research - Economics
October 14, 2015
Where we are now . . . . . . . . . . . . . . . . . . . . . . . . 1
Welcome to the Laird Report. We present a selection of economicdata from around the world to help figure where we are today.
The economy and the stock market are related but certainly not“the same”. Although everything seems to move together these days,its important to step back and consider one of the biggest divergences inthe world right now - the stunning recovery of financial markets sincethe 2008 crisis versus the very slow, plodding recovery of consumers(and I’m in particular looking at the slow recovery of unemploymentmetrics in the US and the EU).
The estimates for US corporate earnings (using the S&P 500 as aproxy) show declining growth rates. Part of this can be blamed on thestrengthening US dollar hurting the value of foreign income, but part isdue to demand which is currently at low levels and not increasing “fastenough”. Unemployment has been slowly but steadily improving overtime, especially in the US, to the point where the past year has seen un-ambiguous improvements in all employment metrics. Initial claims are
at historic lows and the unemployment rate is well below fed targets.
In the press, there’s a lot of concern over corporate profits stagnat-ing in the US and Canada, but its important to consider how historicallyhigh profit margins have become. Those margins can be attributed tovery low interest rates, but also to productivity improvements – mea-sured as the amount of output per person. Much of the productivityimprovements have stayed on the corporate bottom lines with littletrickling down to workers/consumers as higher wages (note: consumersaccount for over 60% of US GDP). Hourly wages have stagnated for along time - especially on a real (inflation adjusted) basis. As the USgets close to full employment, there is usally pressure for higher wages,and as talked about in previous reports, some of that is being seen.
Here’s one version of the economy’s recent history: businessesneeded to tighten their belt and restructure in 2008-2010 to survive,and this hit workers hard due to layoffs. Businesses saw an immedi-ate improvement in bottom lines when the economy stopped shrinking
and this is very slowly trickling down to workers. However, at a certainpoint businesses were running too tight on labour and need to hire morepeople, but this wasn’t inflationary because there was a large pool ofunemployed to draw on. As businesses hire more in the future, hourlywages should increase. Luckily, inflation hasn’t taken off yet becauseraw material prices have stayed low (looking at you, oil), which haskept interest rates low. On the other hand, consumers/workers areonly now seeing low unemployment (which probably helped accountfor consumer sentiment increases in the US earlier this year) but therest of the world is still sputtering with China slowing way down - thatmakes businesses more cautious, which puts a damper on consumersbecause they are a sensitive lot - and now consumer sentiment in theUS is going down again.
In theory, full employment would also imply capacity utilization tobe at some kind of global high - but it hasnt recovered to pre-recessionlevels (so I guess there’s some holes in the story or else there is a waysto go before wage inflation becomes a thing). In short, there’s a strangedynamic of the consumer ascending but business peaking and poten-tially declining – and there is an obvious interaction between the two.No idea which one wins this tug of war. Note that the government is aspoiler in all this as austerity measures are a net drag on the economywhile programs like TARP were boosts while they lasted.
This is mainly a US story - Europe certainly has a huge pool of un-employed and decent labour mobility which would take wage inflation-ary pressures down locally as they can draw on workers from outsideindividual countries). I would assume this means it is taking longerto play out - note that inflation is still very low in Europe. Pricingpressure upwards is a good indication that things are improving. Ifanything, there is a lack of demand in the EU, which is keeping pricesdown. Unemployment in the EU is still simply too high and they can’texport enough to make up for low demand at home.
China is still a mystery in its performance - partially because itdoesn’t data that we can trust (though many would argue the samefor, say, US inflation data) and partially because there are some bigshifts in the structure of its economy. There was a lot of upset earlierwhen Caterpillar talked about plummeting sales in the Asia/Pacific re-gion. Same with Alcoa talking about lower heavy industry demand.Oddly enough, consumer spending in China seems to be holding up -Nike saw sales up 36% in China in their 3rd quarter. In aggregate,Chinese imports declined in September by 20.4% from a year ago - ifmost imports are skewed to capital equipment (no thanks we’re full)and basic commodities (oil’s having a 50% off sale!) then this makessense.
The tug of war in China is whether domestic consumer demandcan make up for lower business investment - this is a major multiyeartransition. The evidence on GDP growth is that consumer demand islagging behind investment for now. Note as well that exports are alsodown, and given China is a major source of finished consumer goods,that implies global demand is still down (though a stronger US dollarwhich makes Chinese goods cheaper also helps US domestic demandwhile still making exports in China look lower).
The transition from export focus to a more balanced local demandfocus was a clear policy decision by China and despite fits and starts(tough to make the whole economy work to your schedule even in aplanned economy) it seems to be following the plan.
Formatting Notes The grey bars on the various charts are OECDrecession indicators for the respective countries. In many cases, the lastavailable value is listed, along with the median value (measured fromas much of the data series as is available).
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Leading indicators are indicators that usually change before theeconomy as a whole changes. They are useful as short-term predictorsof the economy. Our list includes the Philly Fed’s Leading Index whichsummarizes multiple indicators; initial jobless claims and hours worked(both decrease quickly when demand for employee services drops and
vice versa); purchasing manager indicies; new order and housing per-mit indicies; delivery timings (longer timings imply more demand inthe system) and consumer sentiment (how consumers are feeling abouttheir own financial situation and the economy in general). Red dotsare points where a new trend has started.
North AmericaUSA S&P 500 Oct 13 2,003.7 1.2% s 2.6% s -4.6% t 6.9% s 1.00 0.82USA NASDAQ Composite Oct 13 4,796.6 1.0% s -0.2% t -5.4% t 13.8% s 0.97 0.80USA Wilshire 5000 Total Market Oct 13 21,001.6 1.1% s 1.9% s -5.4% t 6.9% s 1.00 0.84Canada S&P TSX Oct 13 13,844.7 1.4% s 3.7% s -4.7% t -1.4% t 0.82 1.00Europe and RussiaFrance CAC 40 Oct 13 4,643.4 -0.4% t 2.8% s -7.1% t 13.8% s 0.58 0.67Germany DAX Oct 13 10,032.8 1.3% s -1.0% t -12.6% t 13.8% s 0.57 0.65United Kingdom FTSE Oct 13 6,342.3 0.3% s 4.2% s -5.9% t -0.4% t 0.59 0.68Russia Market Vectors Russia ETF Oct 13 16.8 2.1% s 5.0% s -6.3% t -18.4% t 0.68 0.73AsiaTaiwan TSEC weighted index Oct 13 8,567.9 2.1% s 3.1% s -5.2% t -1.6% t 0.39 0.49China Shanghai Composite Index Oct 12 3,287.7 0.0% u 5.5% s -17.2% t 39.0% s 0.32 0.37Japan NIKKEI 225 Oct 13 18,234.7 0.3% s 1.5% s -9.2% t 19.2% s 0.43 0.42Hong Kong Hang Seng Oct 13 22,600.5 3.5% s 4.8% s -10.4% t -2.3% t 0.40 0.48Korea Kospi Oct 13 2,019.1 1.4% s 4.5% s -2.1% t 4.8% s 0.40 0.45South Asia and AustrailiaIndia Bombay Stock Exchange Oct 13 26,846.5 -0.3% t 3.8% s -4.0% t 1.8% s 0.46 0.55Indonesia Jakarta Oct 13 4,483.1 0.8% s 2.1% s -8.4% t -8.8% t 0.42 0.51Malaysia FTSE Bursa Malaysia KLCI Oct 13 1,711.1 2.9% s 4.4% s -0.3% t -4.8% t 0.28 0.38Australia All Ordinaries Oct 13 5,234.6 0.7% s 2.2% s -4.1% t 1.6% s 0.31 0.37New Zealand NZX 50 Index Gross Oct 13 5,702.8 0.6% s 0.7% s -0.1% t 10.3% s 0.10 0.19South AmericaBrasil IBOVESPA Oct 13 47,363.0 -0.8% t 0.2% s -10.8% t -18.3% t 0.68 0.67Argentina MERVAL Buenos Aires Oct 13 10,762.5 0.6% s 0.6% s -9.9% t 8.8% s 0.63 0.66Mexico Bolsa index Oct 13 44,318.2 1.7% s 3.5% s -1.5% t 2.9% s 0.71 0.74MENA and AfricaEgypt Market Vectors Egypt ETF Oct 13 41.7 6.1% s 5.0% s -7.2% t -35.2% t 0.38 0.36(Gulf States) Market Vectors Gulf States ETF Oct 13 25.3 -0.1% t 2.6% s -6.5% t -17.8% t 0.44 0.55South Africa iShares MSCI South Africa Index Oct 13 57.7 -0.2% t 5.0% s -10.3% t -7.0% t 0.69 0.62(Africa) Market Vectors Africa ETF Oct 13 21.0 1.8% s 4.4% s -9.7% t -26.9% t 0.61 0.59CommoditiesUSD Spot Oil West Texas Int. Oct 05 $46.3 4.2% s 0.8% s -11.8% t -48.8% t 0.41 0.55USD Gold LME Spot Oct 13 $1,154.4 1.5% s 4.2% s -0.0% t -6.0% t -0.16 -0.06
Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.
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S&P 500 Composite Index
The S&P 500 Composite Index is widely regarded as the best singlegauge of the large cap U.S. equities market. A key figure is the valua-tion level of the S&P500 as measured by the Price/Earnings ratio. Wepresent two versions: (1) a 12-month trailing earnings version which
reflects current earnings but is skewed by short term variances and (2)a cyclically adjusted version which looks at the inflation adjusted earn-ings over a 10 year period (i.e. at least one business cycle). Forecastedearnings numbers are estimates provided by S&P.
12−month P/E ( median = 17.4, Oct = 20.9)10−year CAPE ( median = 19.5, Oct = 24.4)
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S&P 500 Composite Distributions
This is a view of the price performance of the S&P 500 index com-panies. The area of each box is proportional to the company’s marketcap, while the colour is determined by the percentage change in price
over the past month. In addition, companies are sorted according totheir industry group.
% Change in Price from Sep 1, 2015 to Oct 13, 2015
Average Median Median MedianSector Change P/Sales P/Book P/EUtilities 7.8% s 1.6 1.7 18.4Information Technology 7.7% s 3.6 4.4 24.7Industrials 7.1% s 1.5 3.6 18.6Consumer Discretionary 7.1% s 1.6 3.7 20.5Consumer Staples 7.0% s 2.2 5.8 26.8
Average Median Median MedianSector Change P/Sales P/Book P/EEnergy 6.7% s 1.5 1.8 19.3Materials 5.0% s 1.3 3.8 20.5Financials 2.4% s 2.8 1.6 16.4Telecommunications Services 1.1% s 1.4 2.0 26.7Health Care -0.7% t 3.1 3.6 25.8
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US Equity Valuations
A key valuation metric is Tobin’s q: the ratio between the marketvalue of the entire US stock market versus US net assets at replacementcost (ie. what you pay versus what you get). Warren Buffet famouslyfollows stock market value as a percentage of GNP, which is highly(93%) correlated to Tobin’s q.
We can also take the reverse approach: assume the market hasvaluations correct, we can determine the required returns of future es-
timated earnings. These are quoted for both debt (using BAA ratedsecurities as a proxy) and equity premiums above the risk free rate (10year US Treasuries). These figures are alternate approaches to under-standing the current market sentiment - higher premiums indicate ademand for greater returns for the same price and show the level ofrisk-aversion in the market.
Tobin's q (Market Equity / Market Net Worth) and S&P500 Price/Sales
Fund flows describe the net investments in equity and bond mutualfunds in the US market, as described in ICI’s “Trends in Mutual FundInvesting” report. Note however that this is only part of the story as
it does not include ETF fund flows - part of the changes are investorsentering or leaving the market, and part is investors shifting to ETF’sfrom mutual funds.
Interest rates are often leading indicators of stress in the financialsystem. The yield curve show the time structure of interest rates ongovernment bonds - Usually the longer the time the loan is outstanding,the higher the rate charged. However if a recession is expected, thenthe fed cuts rates and this relationship is inverted - leading to negativespreads where short term rates are higher than long term rates.
Almost every recession in the past century has been preceeded by an
inversion - though not every inversion preceeds a recession (just mostof the time).
For corporate bonds, the key issue is the spread between bond rates(i.e. AAA vs BAA bonds) or between government loans (LIBOR vsFedfunds - the infamous “TED Spread”). Here a spike correlates to anaversion to risk, which is an indication that something bad is happen-ing.
US Treasury Yield Curves
For
war
d In
stan
tane
ous
Rat
es (
%)
14 15 16 17 18 19 20 21 22 23 24 250.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5Oct 9, 2015 (Today)Sep 9, 2015 (1 mo ago)Jul 9, 2015 (3 mo ago)09 Oct 2014 (1 yr ago)
Generally, the US Fed tries to anchor long run inflation expectationsto approximately 2%. Inflation can be measured with the ConsumerPrice Index (CPI) or the Personal Consumption Expenditures (PCE)index.
In both cases, it makes sense to exclude items that vary quickly likeFood and Energy to get a clearer picture of inflation (usually called
Core Inflation). The Fed seems to think PCI more accurately reflectsthe entire basket of goods and services that households purchase.
Finally, we can make a reasonable estimate of future inflation ex-pectations by comparing real return and normal bonds to construct animputed forward inflation expectation. The 5y5y chart shows expected5 year inflation rates at a point 5 years in the future. Neat trick that.
The US has been using the program of Quantitative Easing to pro-vide monetary stimulous to its economy. The Fed has engaged in aseries of programs (QE1, QE2 & QE3) designed to drive down longterm rates and improve liquidity though purchases of treasuries, mor-gage backed securites and other debt from banks.
The higher demand for long maturity securities would drive up theirprice, but as these securities have a fixed coupon, their yield would bedecreased (yield ≈ coupon / price) thus driving down long term rates.
In 2011-2012, “Operation Twist” attempted to reduce rates withoutincreasing liquidity. They went back to QE in 2013.
The Fed chairman suggested in June 2013 the economy was recover-ing enough that they could start slowing down purchases (“tapering”).The Fed backed off after a brief market panic. The Fed announced inDec 2013 that it was starting the taper, a decision partly driven byseeing key targets of inflation around 2% and unemployment being lessthan 6.5%. In Oct 2014, they announced the end of purchases.
QE Asset Purchases to Date (Treasury & Mortgage Backed Securities)
Trill
ions
0.00.51.01.52.02.5
0.00.51.01.52.02.5
QE1 QE2 Operation Twist QE3 TaperTreasuries
Mortgage Backed Securities
Total Monthly Asset Purchases (Treasury + Mortgage Backed Securities)
Bill
ions
−100−50
050
100150200
−100−50050100150200
Month to date Oct 07: $−0.02
Inflation and Unemployment − Relative to Targets
Per
cent
02468
10
0246810
Target Unemployment 6.5%Target Inflation 2%
U.S. 10 Year and 3 Month Treasury Constant Maturity Yields
Per
cent
012345
012345
2008 2009 2010 2011 2012 2013 2014 2015
Short Term Rates:Once at zero, Fed moved to QE
Long Term Rates:Moving up in anticipation of Taper?
The banking and finance industry is a key indicator of the healthof the US economy. It provides crucial liquidity to the economy in theform of credit, and the breakdown of that system is one of the exac-erbating factors of the 2008 recession. Key figures to track are the
Net Interest Margins which determine profitability (ie. the differencebetween what a bank pays to depositors versus what the bank is paidby creditors), along with levels of non-performing loans (i.e. loan lossreserves and actual deliquency rates).
Unemployment rates are considered the “single best indicator ofcurrent labour conditions” by the Fed. The pace of payroll growth ishighly correlated with a number of economic indicators.Payroll changesare another way to track the change in unemployment rate.
Unemployment only captures the percentage of people who are inthe labour market who don’t currently have a job - another measure
is what percentage of the whole population wants a job (employed ornot) - this is the Participation Rate.
The Beveridge Curve measures labour market efficiency by lookingat the relationship between job openings and the unemployment rate.The curve slopes downward reflecting that higher rates of unemploy-ment occur coincidentally with lower levels of job vacancies.
There are a number of other ways to measure the health of employ-ment. The U6 Rate includes people who are part time that want afull-time job - they are employed but under-utilitized. Temporary helpdemand is another indicator of labour market tightness or slack.
The large chart shows changes in private industry employment lev-els over the past year, versus how well those job segments typically pay.Lots of hiring in low paying jobs at the expense of higher paying jobsis generally bad, though perhaps not unsurprising in a recovery.
Housing construction is only about 5-8% of the US economy, how-ever a house is typically the largest asset owned by a household. Sincepersonal consumption is about 70% of the US economy and house val-ues directly impact household wealth, housing is an important indicatorin the health of the overall economy. In particular, housing investment
was an important driver of the economy getting out of the last fewrecessions (though not this one so far). Here we track housing pricesand especially indicators which show the current state of the housingmarket.
15 20 25 30 35
150
200
250
300
Personal Income vs. Housing Prices (Inflation adjusted values)
New
Hom
e P
rice
(000
's)
Disposable Income Per Capita (000's)
Aug 2015
r2 : 89.4%Range: Jan 1959 − Aug 2015Blue dots > +5% change in next yearRed dots < −5% change in next year
The Federal Housing Finance Agency provides a quarterly surveyon house prices, based on sales prices and appraisal data. This gener-ates a housing index for 355 municipal areas in the US from 1979 topresent. We have provided an alternative view of this data looking atthe change in prices from the peak in the 2007 time frame.
The goal is to provide a sense of where the housing markets are
weak versus strong.The colours represent gain or losses since the startof the housing crisis (defined as the maximum price between 2007-2009for each city). The circled dots are the cities in the survey, while thebackground colours are interpolated from these points using a loesssmoother.
Change from 2007 Peak − Q2 2015
−50%
−40%
−30%
−20%
−10%
0%
10%
20%
30%
40%
50%
Today's Home Prices
Percentage Change from 2007−2009 Peak
Fre
quen
cy
−75% −50% −25% 0% 25% 50% 75%
Year over Year Change − Q2 2015
−10%
−8%
−6%
−4%
−2%
0%
2%
4%
6%
8%
10%
YoY Change in this quarter
YoY Percent Change
Fre
quen
cy
−15% −10% −5% 0% 5% 10% 15%
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Global Business Indicators
Global Manufacturing PMI Reports
The Purchasing Managers’ Index (PMI) is an indicator reflectingpurchasing managers’ acquisition of goods and services. An index read-ing of 50.0 means that business conditions are unchanged, a numberover 50.0 indicates an improvement while anything below 50.0 suggests
a decline. The further away from 50.0 the index is, the stronger thechange over the month. The chart at the bottom shows a moving av-erage of a number of PMI’s, along with standard deviation bands toshow a global average.
Purchase Managers Index (Manufacturing) − China, Japan, USA, Canada, France, Germany, Italy, UK, Australia
04 05 06 07 08 09 10 11 12 13 14 15
3040
5060
70
3040
5060
70
Business Conditions Contracting
Business Conditions Expanding
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Global Manufacturing PMI Chart
This is an alternate view of the global PMI reports. Here, we lookat all the various PMI data series in a single chart and watch theirevolution over time.
Red numbers indicate contraction (as estimated by PMI) whilegreen numbers indicate expansion.
The OECD calculates import and export values for member coun-tries. Figures are seasonally adjusted and measured in billions of USdollars. Red lines indicate exports, while blue lines indicate imports.Green lines indicate the zero level.
The top part of the graph shows the changes in exports and importson a year-over-year basis, while the bottom part shows the differencebetween exports and imports for that given month (i.e. the trade bal-ance)
Series Dates Sep 2015 Sep 2015 Sep 2015 Aug 2015 Aug 2015 Aug 2015 Sep 2015 Sep 2015� France -7.7 s 10.8 s 1.01 u 105.7 t 110.4 t 0.1 t -15.1 t 50.6 s� Germany -1.1 u 4.5 t 0.65 s NA 114.4 t 0.1 u -9.6 s 52.3 t� United Kingdom 1.6 t 5.5 t 1.85 t 112.3 t NA 0.0 t -10.5 t 51.5 t� Italy -1.0 t 11.9 t 1.92 s 101.2 s NA 0.4 s -11.6 s 52.7 t� Greece -16.4 s 25.0 u 8.54 t 69.6 t NA -0.4 s -47.2 t 43.3 s� Spain 7.6 s 22.2 t 2.02 s NA NA -0.5 t -3.3 s 51.7 t� Eurozone (EU28) -1.2 t 9.5 u 1.26 t 106.4 t 111.1 t 0.0 t -12.2 t NA
Tracking the Chinese economy is a tricky. As reported in the Fi-nancial Times, Premier Li Keqiang confided to US officials in 2007 thatgross domestic product was “man made” and “for reference only”. In-stead, he suggested that it was much more useful to focus on three alter-native indicators: electricity consumption, rail cargo volumes and bank
lending (still tracking down that last one). We also include the PMI- which is an official version put out by the Chinese government anddiffers slightly from an HSBC version. Finally we include the ShanghaiComposite Index as a measure of stock performance.
Temperature and precipitation data are taken from the US NationalClimatic Data Center and presented as the average monthly anomalyfrom the previous 6 months. Anomalies are defined as the difference
from the average value over the period from 1971-2000 for the tem-perature map and over the 20th century for the global temparaturechart.
Average Temperature Anomalies from Mar 2015 - Aug 2015
<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0Anomalies in Celcius WarmerCooler Anomalies in Celcius