Monday, October 24, 2016

Signs of Recession, Part 2

I guess signs of recession will be a new series.  Whoop-die freakin' do.

Here are some apparently mixed signals from employment flows.

 Net employment flows between unemployment and employment have taken a sharp turn into recessionary territory.

But, on the other hand, flows from out of the labor force, into employment, are very strong - at least as strong as 2004-2005.

The flows in 2004-2005 were related to the huge migration flows out of the Closed Access cities during the housing boom.  In 2006, flows into employment dropped dramatically - from unemployment, and especially from out of the labor force.  This is because the Federal Reserve inverted the yield curve and purposefully slowed down real residential investment.  The beginning of the collapse of the mortgage markets that resulted, both reduced funding for new homes in Contagion cities and reduced the pressure on the housing stock in the Closed Access cities.  So, the first effect of the recessionary conditions of 2006 wasn't for unemployment to rise, it was for those migration flows out of Closed Access cities to dry up.

The interesting thing about that migration was that it wasn't a traditional migration to employment.  There were plenty of jobs in Closed Access cities.  It was migration due to cost, which is this super-duper way we have decided to run an economy these days, with a virtual wall surrounding our most dynamic labor markets so that we naturally segregate by income and skill, with a rent-soaked high income urban core and a deprived rural inland.

So, the decline in migration in 2006 didn't lead to unemployment.  Those households who were now staying in the Closed Access cities were employed.  They were just economically stressed by costs in spite of being employed.  Rent inflation shot up in 2006 and 2007 while housing starts collapsed and this migration pattern sharply declined.

So, I don't expect to see the same patterns as we move into this recession, because that migration pattern isn't in place today.  Households are already stuck in the high cost Closed Access cities because for a decade we have made sure to prevent housing and mortgage finance from recovering.

So, what do gross flows tell us about flows between employment and not-in-labor-force?  Here, the indicator is recessionary.  I'm not sure what forces are behind the net flow.  Normally the net flow would turn negative at the same time that gross flows began to downtrend.

I don't know if there are any home runs that can be hit in this context.  I'm not sure there are any obvious areas of excess valuation or systemic risk.  This could be sort of a mix of 1991 (relatively mild stock market shock) and 2001 (relatively mild pause in housing expansion) and there certainly isn't much upside in bonds to prepare for.  I'm not sure there is much to do but wait for the Fed to blame something else for the recession after they crimp the money supply too much and give themselves permission to do QE4.  I hope it happens sooner rather than later.


  1. Do we know why the jobs figures tend to miss turning points? I seem to recall that the jobs figures for Jan 2008 to August 2008 showed a total loss of about 400,000 jobs. Yet those have since been revised to a total loss of 1,200,000. If the Fed asked me for advice, I'd say loosen, loosen and loosen any time the 10 year Treasury was yielding less than 3.5% and tighten any time it was yielding more than 5%. Treasury yield data doesn't get revised. [smiley face]

    1. I think Roger Farmer's idea of targeting the price of equities is interesting. From a CAPM point of view, what would happen if we basically completely removed cyclical risk from the equity market? I think it could potentially raise interest rates and lead to much more productive investment.

  2. I'd be leery of that. If equity prices were truly guaranteed to follow a lock step rise, they'd be (closer to) risk free so total returns would be lower, which means the cost of capital would be lower. I think we'd see a rush of firms looking to go public and firms being founded to go public and firms really couldn't afford to stay private. With total return equal to div yield plus the rate of appreciation, what total return or appreciation would be target? Historically, stocks have risen approx. in line with NGDP growth. So if we targeted 4% growth for both, dividend yields would fall from 2% toward zero and prices would approach... infinity? not really, but you see my concern. Frankly, even my advice to use 10-year yields might run into problems once it became known. It should only be used as a warning bumper and the bumpers adjusted over time once the Fed moves to a stated NGDPLT target. At the current time though, with a stated 2% inflation target that is purportedly symetrical, tightening with the 10 year at 1.75% is outrageous and stupid.

    1. I think you have to be careful to separate nominal and real growth and capital gains vs. income.

      I think cost of equity could possibly remain somewhere close to what it is today, but risk free rates would rise up to meet them. If there weren't tax advantages to debt, maybe there wouldn't be much demand for debt, and that would all be sustained because real growth rates would be higher and the targeted growth level together with broader equity ownership would mean that systemic contractions would be very tame.

      I don't know if that would be the case, but it is interesting to think about.

  3. Great post. I have been trying to interest people in property zoning…but on one cares.