Paulo's Econ Watchhttp://pgrahl.postach.io/feed.xml2016-07-15T19:41:26.950000ZWerkzeugUS 1Q16 GDP (second release): the good and the badhttps://pgrahl.postach.io/post/us-1q16-gdp-second-release-the-good-and-the-bad2016-05-27T18:38:58.921000Z2016-05-27T13:44:18ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><u>Main takeaways:</u></b></span></div>
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<div>The good:</div><ul><li>Overall 2% yoy growth is good given the headwinds the energy sector, strong dollar and tighter financial conditions in 2015.</li><li>1Q GDP revised up three tenths to 0.8%.</li><li>First released of real GDI at a strong 2.2% and 4Q15 was revised up by 1 percentage point to 1.9%. </li><li>Adjusting for 'residual' seasonality would lead to a materially higher growth in 1Q (2.4%), more in line with the income report (GDI).</li><li>Net exports appear to be improving, after subtracting more than 0.5 percentage points from 2015 growth.</li><li>Residential investment is performing quite well.</li></ul><div><br/></div>
<div>The bad:</div><ul><li>Growth in 2Q15 was 3.9% so there is a high hurdle for keeping annual GDP at 2%.</li><li>ISM suggest the inventory cycle is not complete. Change in inventories will likely to continue subtracting from growth.</li><li>Household consumption slowed down materially (but there's some hope it will rebound, based on the latest retail sales report).</li><li>Non-energy related investment slowed down substantially in the last two quarters. Is the energy crisis spreading to other sectors ? Most recent durable goods report does not show any substantial improvement in capex.</li><li>Discretionary spending slowed down in the last few quarters, and this often is a bad omen for future growth.</li></ul><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
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<div><b>Outline of the rest of the report:</b></div>
<div>- GDP second release vs. advance</div>
<div>- GDP vs. GDI</div>
<div>- GDP Plus</div>
<div>- Discretionary spending</div>
<div>- 'Residual' seasonality</div>
<div>- Inventory cycle</div>
<div>- Chart pack -- full details</div>
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<div><b>GDP second release</b></div>
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<div><b>First quarter GDP revised up three tenths to 0.8%; first release of real GDI at a strong 2.2% and real GDI for the 4Q15 was revised up by 1 percentage point to 1.9%.</b></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/9d05822f-4f96-4c74-805c-c7469891e229.png" style="height: auto;"/></div>
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<div><b>GDP and GDI</b></div>
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<div>Both measures -- Gross Domestic Product and Gross Domestic Income -- should be equal (income = expenditure) but the data sources used to produce them are different and there is no effort to reconcile them, thus both contain valuable information. GDP uses the final expenditure approach and GDI is measured using the income approach. GDI is not available at the time of GDP's advance release and often gets relegated to a secondary role, although some researchers point to GDI as a better gauge of the economy (<font size="2">e.g., Nalewaik, J.J. (2010), “The Income- and Expenditure-Side Estimates of U.S. Output Growth," Brookings Papers on Economic Activity, 1, 71–127</font>).</div>
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<div>The chart below plots both GDP and GDI. Interesting to note that GDI was flat ahead of the last recession while GDP was still trending up -- so, in that case, GDI provided a better heads-up for the incoming recession.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/e7d1cf20-8a8b-48d5-bcf6-7ea5032eb855.png" style="height: auto;"/></div>
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<div>Another way of looking at the discrepancy between income and expenditure is to look at household savings rate. Consumers held off buying despite healthy income gains.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/d38276a4-eeff-40a3-870c-94fd11f6ac97.png" style="height: auto;"/></div>
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<div><b>GDP Plus</b></div>
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<div>An estimate of growth using both GDP and GDI is produced by <font color="#0000EE"><u>Aruoba</u></font><a href="http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-16.pdf">, Diebold, Nalewaik, Schorfheide, and Song (ADNSS)</a> and is called <b>GDP Plus</b>. The authors view GDP and GDI as noisy measures of the underlying latent true GDP. Their results are published regularly in the Philadelphia Fed web page. GDP Plus tends to smooth the quarterly changes. The reading for GDP plus in 1Q16 was 2.3% vs the 0.8% in the second GDP print.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/559b27d5-f5a1-4431-aeef-8bcdbecebd31.jpg" style="height: auto;"/></div>
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<div><b>GDP: looking at discretionary spending</b></div>
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<div>Discretionary spending often slows down ahead of a recession, and given the weakness in some recent economic and financial indicators at the turn of the year, it is interesting to look at some charts to gauge the behavior of discretionary spending.</div>
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<div>The ratio of growth in spending on consumer durables and private investment to final sales growth (the "Duncan" indicator) is a useful indicator. The chart below shows that this indicator usually turns down before the recession (shaded areas in the chart). The first chart considers total private investment and the second excludes investment in the energy sector. Both suggest discretionary spending slowed down. The indicator ex. energy has not consistently turned down, but it bears watching.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/2a7a44b2-c59a-40de-9d20-52f51fa8d945.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/595fb284-230f-4a6e-bebd-d67701e5f58e.png" style="height: auto;"/></div>
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<div>Another way to look at discretionary spending is to look at the share of the income spent on those items. The chart below highlights that consumption of durable goods and investment is still at low level as a share of income. Even excluding residential investment, it seems that there would be room for the share of discretionary spending in total income to grow. Nevertheless, it has turned south since early 2015. Even when one excludes energy, there is a down tick in both 4Q15 and 1Q16 that is important to monitor.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/005d789d-b92b-4c60-9e8e-5ff3d95cf51e.png" style="height: auto;"/></div>
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<div><b>GDP 'residual' seasonality</b></div>
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<div>Regarding 'residual' seasonality one can make a very simple adjustment by applying a simple seasonal filter to BEA's published GDP statistics. As the chart below shows, that would move 1Q GDP from 0.8% to 2.4%, more aligned with the growth of GDI reported earlier.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/c692a8bd-cbef-4e8d-9482-444f7fba4d97.png" style="height: auto;"/></div>
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<div><b>Inventory Cycle</b></div>
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<div>The ISM data still hints at further downside to growth coming from inventory adjustment.</div>
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<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/e4554afb-aa1a-40f1-b91e-b617ec51ef9d.png" style="height: auto;"/><br/></b></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP Chart pack</b></span></div><hr/><div><b>GDP growth not stellar, but is running above potential...</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/bf8d2b3c-e7fe-4478-871e-99475ea450b3.png" style="height: auto;"/></div><hr/><div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">GDP increased 2.0% yoy in 1Q; trend in the last 2 years is 2.4%; 2Q last year was 3.9% so there is a high hurdle for keeping annual GDP at 2%.</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/d4c98482-e32c-4049-b586-ba049236857b.png" style="height: auto;"/></div>
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<div><b>GDP and real GDI (gross domestic income) are both growing at around 2% yoy. </b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/44e59819-2228-43d6-9386-3aaf83c5f302.png" style="height: auto;"/></div>
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<div><b>GDP excluding inventories is growing at 2.3% in the last 2 years and 2.3% yoy</b></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The value of goods and services purchased by US residents (regardless of where goods and services were produced) excluding inventories is growing at a healthy 2.7% since 2014.</span></b></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Business value added slowed to 2.3% in Q1, but overall growth since 2014 is 2.8%.</span></b></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: Consumption</b></span></div>
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<div><b>Consumption is growing at 2.7% yoy (constant prices)</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/6d78ebd3-c5c8-45de-89d0-00642cc30418.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/b5e76943-944f-4c8d-89dc-19b0b4fef6f3.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Core consumption (excluding energy and food) is even a bit higher.</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/8fe499e7-9fd9-4d54-8d04-5aa53a5792ba.png" style="height: auto;"/></div>
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<div><hr/><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: Investment</b></span><hr/></div>
<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The annual pace of investment growth is slowing materially...</span></b></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">...and the slowdown spread to other areas outside the oil sector in the las two quarters (average 2% growth)</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/586e69bb-c589-460e-975b-a7052b2c6957/19ca5207-ff40-46b5-82f5-bda949d086c4.png" style="height: auto;"/></div>
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<div><b>Excluding residential investment, one can see more clearly the slowdown in investment spreading to non-energy sectors.</b></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: External trade</b></span></div>
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<div><b>Exports flat, likely due to global growth slowdown and dollar strengthening...</b></div>
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<div><b>...while imports slowed down substantially in the last few quarters, since the slowdown in investment was combined with slowdown in consumption in the last two quarters.</b></div>
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<div><b>Is the worst over for net exports?</b></div>
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<div><b>GDP breakdown: government</b></div>
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<div><b>Government consumption and investment bottomed in 2014 and will likely continue to add to growth next year.</b></div>
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US Inflation broadly in line with consensushttps://pgrahl.postach.io/post/us-inflation-broadly-in-line-with-consensus2016-07-15T19:41:26.950000Z2016-05-17T15:48:40ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Monthly headline (0.4%mom, 1.1%yoy) and core inflation (0.2%mom, 2.1%yoy) broadly in line with market consensus.</li><li>Inflation momentum at 2.4%.</li><li>Sticky-price CPI (a proxy for expectations) is at 2.5%.</li><li>Inflation expectations moving sideways and inflation compensation moving up.</li></ul><div><hr/></div>
<div><u><b>Headline CPI up, core CPI down</b></u></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ff1f5178-f579-43b4-bf88-8651c9721f47/e7e22579-4df7-440b-9eb2-d8d116ab1867.png" style="height: auto;"/></div>
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<div><u><b>Inflation momentum off the highs, but still at 2.4%</b></u></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ff1f5178-f579-43b4-bf88-8651c9721f47/61b229dc-6eb5-46aa-9c21-20bd4a0fd14a.png" style="height: auto;"/></div>
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<div><u><b>Inflation momentum above annual core inflation</b></u></div>
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<div><u><b>Sticky prices suggest inflation is firming</b></u></div>
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<div><u><b>Measures of inflation expectations and compensation</b></u></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ff1f5178-f579-43b4-bf88-8651c9721f47/673e1f46-0487-41f5-8f4e-ac7b00f1c920.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ff1f5178-f579-43b4-bf88-8651c9721f47/fd0bc78f-cd60-4197-aead-86985905f574.png" style="height: auto;"/></div>
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US April/16 Payroll: net job creation slowed downhttps://pgrahl.postach.io/post/us-april-16-payroll-net-job-creation-slowed-down2016-05-06T22:50:38.490000Z2016-05-06T15:00:18ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div>
<div><hr/></div><ul><li>Net job creation slowed down, as suggested by a mix of labor market data ('labor market conditions').</li></ul><ul><li>Monthly payroll changed from being 'surprisingly resilient' to being 'disappointing'. </li><li>While one should have expected the pace of job creation to slowdown, April's result can be traced back to 'construction', 'retail sales' and 'government' categories.</li><li>Looking at the overall trend in those categories, one would hardly be too worried abut the weak prints in April.</li><li>Also, hours worked and average hourly earnings posted healthy gains in April.</li><li>Wage growth has steadily increased since early 2015; the Phillips curve seems to be alive and well. </li><li>The household survey showed a 316 thousands <i>loss</i> of jobs in April; but this was on the back of an average gain of 464 thousands in the first quarter.</li><li>Despite the loss of jobs, unemployment rate remained stable at 5% since participation rate gave back part of the previous gains (from 63% to 62.8%).</li></ul><div><br/></div>
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<div>Most people were surprised job creation was very resilient to the tightening of financial conditions and the GDP slowdown.</div>
<div>Now, most people are disappointed by the slowdown in April's payroll...go figure!</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/29ef326f-65fe-4452-8b0c-98dcbe37cfb3.png" style="height: auto;"/></div>
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<div><span style="font-size: 21px;"><b><u>Establishment Report</u></b></span></div>
<div>Net job creation in the private sector slowed from about 230k per month in the second half of 2015 to 183k/month in the first four months of 2016. This should not be a major surprise. Indeed, my own track of labor market conditions suggested "underlying private payroll running at around 170 / 183 thousands/month". (See "<a href="http://www.evernote.com/l/AJE5jV1IF3xHFIrJi6rxS00yrtaD54LpfN8/">US Labor Market Conditions</a>").</div>
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<div>The chart below shows the evolution of the 6-month payroll average in <i>real time</i>. It shows an uptrend in the second half of 2015 that was at odds with the tightening of financial conditions observed in the same period. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/383e1919-3609-476b-94e6-e40a776bdf70.png" style="height: auto;"/></div>
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<div>To be fair, the reason for concern / disappointment is probably more linked to the fact that, when looking at divergent signs (employment pickup vs growth slowdown) some observers were putting more emphasis on the more upbeat employment date -- an emphasis that several Fed members often also give in their own speeches.</div>
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<div>But specifically for April, we can trace the slowdown in private job creation to construction and retail sales. Construction added, on average, 36 thousand jobs per month in 4Q 15 / 1Q 16 and April reported a mere 1k increase. Similarly, retail sales added 40 thousands per month in 4Q/1Q and April printed <i>minus</i> 3k.</div>
<div><br/></div>
<div>The following two charts plot the employment level in retail and construction, as well as the trend in the last two years and the last 12 months (orange bars show monthly changes). One can hardly see a problem in those employment groups. </div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50.080775444264944%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/3876cd17-30b5-4960-9939-5ae1e55b7f53.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.83844911147011%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/d5233a5f-31d9-4923-a1b6-2092bdd2ac61.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
<div>Also, the weakness in the establishment report was confined to the headline payroll number, since both hours worked and wages increased in the month. Total hours worked rose a healthy 0.4% in April (for production workers) and now stand at 1.6% above the first quarter average level. This is not great, but compares favorable to the first quarter (1.2%) and to sub 2% GDP growth estimates for the second quarter. </div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/6998ddc6-e1fc-468d-9d22-851bdb565ccd.png" style="height: auto;"/></div>
<div><br/></div>
<div>Average hourly earnings also posted a strong 0.3% mom growth in April, leading to 2.5% growth compared to a year ago. But what is more striking, in my view, is that wage growth has steadily increased since early 2015 at the same time that most pundits complain that wages are not going anywhere. The chart below shows the Phillips curve seem to be well and alive: wage growth starts to increase following two years of very strong job growth (2014 and 2015) and with unemployment rate very close to NAIRU.</div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;width:100%;table-layout:fixed;margin-left:0px;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/2eb33612-39af-4acc-9275-8d09c20b3132.png" /></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/a982b5ab-238d-46bd-8fca-c59c455953cc.png" /></div></td></tr></table><div><br/></div>
<div>Total (nominal) labor income rose a strong 0.7% mom in April, but the carry over for the second quarter is a mere 3.3% for production workers and 3.7% for all employees. With rising inflation, this means real purchasing power is going down. Consumers would have to tap their (increasing) savings if consumption is expected to rebound from the weak first quarter.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/19a241b4-1cf8-4d61-888b-e23e54c8f5ce.png" style="height: auto;"/></div>
<div><br/></div>
<div><span style="font-size: 21px;"><u><b>Household Report</b></u></span></div>
<div>The household report is often very volatile in a monthly basis, but it painted a weaker picture with net job <i>losses</i> of 316 thousands in the month. Truth be told, the household report had shown an average gain of 464 thousands per month in the first quarter. Indeed, even with April's losses, the average 2016 employment gain in the household report stands at 270k/month.</div>
<div><br/></div>
<div>Despite the losses in the month, unemployment rate remained flat at 5% due to a 362 thousand drop in the labor force. Participation rate dropped from 63% to 62.8% and remains close to the level observed in 2014 and early 2015. The pick-up in LFPR since last September has confused many observers and there is no clear reason why that has happened; contrary to often stated views, the pick up does not seem to be due to more people joining the labor force in response to a strong labor market. It is very difficult to have confidence in a short term forecast of LFPR but, over the years, demographics should dominate short-term fluctuations leading to lower participation in the coming years. </div>
<div><br/></div>
<div>If one assumes labor participation remains flat at current levels, then a monthly job creation of 175k would lead to unemployment rate at 4.6% by the end of the year. </div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tbody><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50.080775444264944%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/26d59513-cf35-425b-b94d-dbb4d8d73abf.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.83844911147011%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/4afde67e-ba62-4ddd-98ae-bfc4194de016.png" style="height: auto;"/></div></td></tr></tbody></table><div><br/></div>
<div>The charts below show employment to population ratio and the broader U6 unemployment rate.</div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;width:100%;table-layout:fixed;margin-left:0px;"><tbody><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/efe4ae6d-7d11-4839-a577-997c61a61ffc.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/af88f644-755b-456c-9035-df3041ae3fd3/170b2a22-e961-4aa5-8b5f-48d8637fae38.png" style="height: auto;"/></div></td></tr></tbody></table><div><br/></div>
<div><br/></div>
April employment by categoryhttps://pgrahl.postach.io/post/april-employment-by-category2016-05-06T14:23:35.654000Z2016-05-06T14:15:35ZPaulo Gustavo Grahl, CFA<div><h1 style="box-sizing: border-box; font-size: 34px; margin: 20px 0px 10px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 500; color: rgb(49, 126, 172); font-style: normal; font-variant: normal; letter-spacing: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255);">April employment by category</h1><p style="box-sizing: border-box; margin: 0px 0px 10px; color: rgb(85, 85, 85); font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255);">The charts below show employment by category. The blue line is total employment in the category, the orange bar is monthly change and the red line is the linear regression in the last two years and in the last one year.</p><p style="box-sizing: border-box; margin: 0px 0px 10px; color: rgb(85, 85, 85); font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255);"><strong style="box-sizing: border-box; font-weight: bold;">Total payroll increased 160k in April</strong>, after a 208k growth in March (which was revised down from 215k). The trend for the last 6 months slowed from 260k/month by the end of 2014 to 237k in the 6 months to December/15 to 220k in the 6 months to April/16.</p><p style="box-sizing: border-box; margin: 0px 0px 10px; color: rgb(85, 85, 85); font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255);"><strong style="box-sizing: border-box; font-weight: bold;">Private payroll increased 171k in April</strong>, after 184k growth in March (revised down from 195k). The trend for the last 6 months slowed from 250k/month by the end of 2014 to 229k in the 6 months to December/15 to 212k in the 6 months to April/16.</p><div style="box-sizing: border-box; margin: 0px 0px 10px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; -webkit-text-stroke-width: 0px; background-color: rgb(255, 255, 255);"><div><span style="font-size: 14px;"><span style="font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Most of the slowdown in the pace of job creation was concentrated in the goods producing sector (mining and manufacturing); construction jobs are doing ok and the the services sector has, so far, not being affected by manufacturing slowdown. Overall, the 6-month pace of job creation in the goods sector slowed from 50k (at the end of 2014) to close to 18k at the end of 2015 and 16k by Apr/16, while in the services sector it slowed from 200k to 211k to 195k in the same comparison.</span></span></span></div>
<div><span style="font-size: 14px;"><span style="font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><br/></span></span></span></div>
<div><span style="font-size: 14px;"><span style="font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Full set of charts in the link: <span style="color: rgb(85, 85, 85);"><a href="http://bit.ly/us-payroll-category-apr16">http://bit.ly/us-payroll-category-apr16</a></span></span></span></span></div></div></div>US wages: going uphttps://pgrahl.postach.io/post/us-wages-going-up2016-04-29T19:51:26.284000Z2016-04-29T13:53:34ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>ECI is Fed's preferred measure of wage growth.</li><li>So is is worth looking beyond the headlines...</li><li>...and they suggest wage growth is firming.</li><li>Wages are growing at 2.5% pace, higher than the headline 2.1% would suggest, and...</li><li>...the pace of wage growth in increasing -- as one would expect.</li></ul><div><hr/></div>
<div>The employment cost index (ECI) measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries -- and therefore is often Fed's preferred measure of labor costs. Total compensation costs for civilian workers is the measure that makes the headlines. It includes wages and salaries (around 70% of compensation costs) and benefits. Civilian workers includes private industry and state and local government establishments.</div>
<div><br/></div>
<div>I will focus only on <i>wages and salaries</i> for <i>private industries</i> of the ECI report.</div>
<div><br/></div>
<div>The chart below shows that wages and salaries for private industry workers rose 2.1% yoy in the first quarter of 2016, unchanged from the number reported in 4Q 2015. However, there is clearly a base effect (1Q 2015 seems to have been an outlier) and wages increased 2.6% annualized in the last three quarters (2.9% ar in 1Q 2016). </div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/cb8679c9-bf53-4c83-b4c6-fdfcbefbeedf.png" style="height: auto;"/></div>
<div><br/></div>
<div>The ECI report breaks down wages by industry. The chart belows shows a surprising result: wages in the goods-producing industries (and manufacturing) -- a sector which is currently struggling -- is rising faster than wages in services and the growth rate is <i>increasing</i>.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/150d0be7-a3b1-4dae-ad95-effd7a34c3a6.png" style="height: auto;"/></div>
<div><br/></div>
<div>But the above-mentioned discrepancy is also only due to base effect. When looking at the last two or three quarters, wage growth in both goods and services producing industries were close to 2.5% annualized.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/2a369216-4b10-4ce3-bcae-2a1e35029a81.png" style="height: auto;"/></div>
<div><br/></div>
<div>One can also look at the detailed industry breakdown (looking into goods and services sectors). There is a lot of noise in the breakdown, but the black line in the chart below shows a simple average of annual wage growth for the main industries. </div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/947683e1-6458-420d-938a-f87489d692eb.png" style="height: auto;"/></div>
<div><br/></div>
<div>The chart below plots only the average for the main industries in order to highlight the recent trend. </div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/49a6b1ab-8c81-46ef-a893-828f36351ded.png" style="height: auto;"/></div>
<div><br/></div>
<div>Another way to understand the base effect is to look at wages by occupational group. We can see that <i>sales & office</i> spiked in the first quarter of 2015 and therefore the annual growth rate collapsed in 1Q 2016. </div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/2dc1fe8a-8d35-4358-a0fb-9c042b307f26.png" style="height: auto;"/></div>
<div><br/></div>
<div>The chart below highlights the spike in wages for <i>sales & office</i> occupational group that happened in early 2015. There is an interesting <a href="http://www.bls.gov/opub/mlr/cwc/the-role-of-incentive-pay-in-the-volatility-of-the-employment-cost-index.pdf">paper</a> explaining the volatility in the ECI indexes due to rates of pay that are defined wholly or in part on the results of worker efforts and the BLS reports an index of wages <i>excluding incentive paid occupations</i>. The chart also shows that the spike was related to performance incentives / bonus.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/76f73884-9611-4ac7-9ce6-ae615ba48cb9.png" style="height: auto;"/></div>
<div><br/></div>
<div>The chart below reproduces wages by occupational groups <i>excluding incentive paid</i> occupations (except for natural resources and construction). One gets a very different picture of wages by looking at this chart.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/26d22a81-04f6-4598-a6e7-1a8ac6d8a9f5.png" style="height: auto;"/></div>
<div><br/></div>
<div>Now back to <i>all</i> wages. It shows that wages for private industry workers ex. incentive pay is growing at 2.5% yoy (vs. 2.1% when incentive pay is considered) and in the last two quarters wage growth has been 2.6% annualized (vs. 2.3% annualized when incentive pay is considered).</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/016ec692-cce5-4c2d-a28c-33f7faadc35a/b8d9417d-7686-4b54-ba5d-8c5d8758d03d.png" style="height: auto;"/></div>
US Mar/2016 retail sales weaker than consensus (again)https://pgrahl.postach.io/post/us-mar-2016-retail-sales-weaker-than-consensus-again2016-04-13T18:32:27.850000Z2016-04-13T18:25:39ZPaulo Gustavo Grahl, CFA<div><span style="font-size:20.0pt; font-family:"Helvetica","sans-serif"; color:#317EAC">Main takeaways (</span><a href="http://bit.ly/us-retail-mar16">http://bit.ly/us-retail-mar16</a><span style="font-size:20.0pt; font-family:"Helvetica","sans-serif"; color:#317EAC">)</span></div>
<div style="color:#555555; background:white"><br/></div><ul><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">March retail sales weaker than consensus (again).</li><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">Expectations for consumption had already been revised down after the weak Jan/Feb PCE report; today's retail sales report do not change that, despite some upward revision to the previous couple of months.</li><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">This weakening of consumption is somewhat puzzling given the strong income and employment, high level of consumer confidence, and credit still flowing.</li><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">Softer retail sales can be attributed to tighter financial conditions until Jan/Feb...</li><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">...but, in my view, the <i>bulk</i> (i.e., not all) of the current slowdown continues to be driven by gasoline sales...</li><li style="color: rgb(85, 85, 85); background-color: white; background-position: initial initial; background-repeat: initial initial;">...and, perhaps, by some seasonal adjustment issues.</li></ul><div style="color:#555555; background:white"><br/></div>
<div><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"; color:#555555">Charts in the link:</span> <a href="http://bit.ly/us-retail-mar16">http://bit.ly/us-retail-mar16</a></div>
US outlook: dovish and confused (Apr/16)https://pgrahl.postach.io/post/us-outlook-dovish-and-confused-apr-162016-04-12T18:38:21.204000Z2016-04-12T13:37:28ZPaulo Gustavo Grahl, CFA<div>Link para a apresentação de US: <a href="http://bit.ly/us-outlook-apr16"/>http://bit.ly/us-outlook-apr16</div>
<div><br/></div>
<div><span style="color: rgb(45, 79, 201);"><u><b>Main takeaways:</b></u></span></div>
<div>* Global risks the main reason behind FOMC's dovish stance (China, strong dollar).</div>
<div>* I think the odds are for an improving global backdrop in the coming months.</div>
<div>* Global (and US) manufacturing showing some tentative signs of improvement...</div>
<div>* ...but consumption softens in the US. It is likely temporary, but will keep Fed on hold.</div>
<div>* Improving labor force participation and lack of wage growth helps Fed's narrative (but recall ULC is increasing at the same pace as 2004!).</div>
<div>* Yellen has questioned the recent firming of core inflation. She was right once (recall <i>"inflation is noisy"</i> comment in 2014). But not likely to be right this time - a myriad of inflation indicators suggest the pickup in core inflation may be sticky.</div>
<div>* FOMC focus on global risks, asymmetry, and inflation expectations opens room for inflation swaps / TIPS to move higher.</div>
<div><br/></div>
<div><span style="color: rgb(45, 79, 201);"><u><b>Conclusions:</b></u></span></div>
<div>* As anticipated in <a href="http://bit.ly/us_outlook_mar_2016">our last outlook report</a> the Fed decided to pause to watch: impact of tightening financial conditions, dollar and oil/commodity prices, drop in inflation expectations, path of actual inflation, ISM and manufacturing data, credit data, inventory adjustment.</div>
<div>* But the Fed also opted to emphasize risks to the <i>global economy</i> and the asymmetric risks facing the normalization of policy rates.</div>
<div>* Fed stopped short of supporting a period of inflation overshoot to offset the below target prints.</div>
<div>* Soft-patch in consumption in 1Q (despite incipient manufacturing rebound) keeps pushing forward the next rate increase.</div>
<div>* Risks abound, but my guess is that the economy will remain in the current path, global worries would not escalate and, by mid 2016, the Fed would be ready to signal rate hikes would resume. Two hikes in the second half of 2016 continues to be a reasonable base case (July or Sept for the next one).</div>
<div><br/></div>
<div><span style="color: rgb(45, 79, 201);"><u><b>Trading views: inflation swaps embedds a lot of downside risks</b></u></span></div>
<div>* Intermediary inflation swaps (5-year swap, 2 years forward) appear too low.</div>
<div>* Inflation in <u><i>the last five years was</i></u> 1.4%/year, even after the large drop in energy prices !!</div>
<div>* If oil prices stabilize, inflation would increase to 2.0%-2.5%.</div>
<div>* Recall the Fed story of asymmetric risks favor a pickup in inflation.</div>
<div>* But wasn't this pick-up in inflation the story of 2015? Yes, but China and oil changed the picture. Would it happen again?</div>
<div>* Recall that, a year later, the economy is even closer to NAIRU. Is the Phillips curve really dead?</div>
<div><br/></div>
<div> </div>
US March/16 Payroll: resilient labor markethttps://pgrahl.postach.io/post/us-march-16-payroll-resilient-labor-market2016-04-05T19:34:08.813000Z2016-04-01T19:01:35ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div>
<div><hr/></div><ul><li>Labor market surprisingly resilient: services unabated by manufacturing slump.</li></ul><ul><li>But the weakness in manufacturing hours/employment needs to be seen in the context of an incipient rebound in US manufacturing activity (ISM bottomed in February).</li><li>Wage trend appears to be unchanged (not slowing down, but not speeding up either).</li></ul><ul><li>Unemployment rate has stabilized at the top of Fed’s NAIRU.</li><li>The 6-month increase in participation rate is big; last time it happened was 1992.</li></ul><ul><li>Well-behaved wages and increase in labor supply takes the pressure off the Fed (less ammunition for the hawks).</li><li>BUT that does not mean the markets are right! Mkt consensus is even more dovish than Yellen – something that does not make much sense in the face of strong labor market, rebound in manufacturing, strong consumer confidence, easing of financial conditions, firming of inflation.</li></ul><div><br/></div>
<div>Charts and more details: <a href="http://bit.ly/us-payroll-mar16"/>http://bit.ly/us-payroll-mar16</div>
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<div>Breakdown of employment by category: <a href="http://bit.ly/us_payroll_category_mar16">http://bit.ly/us_payroll_category_mar16</a></div>
Global trade volumes in January/2016https://pgrahl.postach.io/post/global-trade-volumes-in-january-20162016-03-24T20:55:49.587000Z2016-03-24T17:57:11ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><hr/><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">World trade volumes resilient, despite risk-off in financial markets.</span></li><li>World trade volumes growing at around 1.8% per year, but with sharp contrast between advanced and emerging economies.</li><li>Advanced economies imports growing at a strong pace, but growth might have slowed a bit in recent months.</li><li>Trade volumes in emerging economies, on the other hand, are flat (but with some tentative sign of improvement in imports).</li></ul><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Netherlands Bureau for Economic Analysis (CPB - Centraal Planbureau) has released world trade volume and industrial production data for January. </span></div>
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<div>World trade prices (exports and imports) dropped materially since mid-2014, in tandem with oil prices. Trade prices fell by 45 % for advanced economies (AE), 60% for emerging economies, while oil prices dropped 120% in the same period ! (welcome to log % changes !!)</div>
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<div>This has confused some pundits that often mention the collapse in global trade growth looking only at <i>nominal</i> (or current US$) trade performance. Looking at <i>trade volumes</i> one reaches a different conclusion (more on this below).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/d82bff35-af57-4968-bd92-2260d6790e1d.png" style="height: auto;"/></div>
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<div>The overall drop in trade prices for both emerging and advanced economies masks an important difference: the regions faced opposite terms of trade shocks in recent years. Advanced economies are facing improving terms of trade, while EM economies are facing a declining terms of trade (but with a tentative sign of a rebound, see charts). </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/bc49f76b-dba6-4778-9bdc-9db3f0e74f11.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/06ed5cb0-f7d1-439e-8ffb-fca4cf108476.png" style="height: auto;"/></div>
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<div><span style="font-size: 21px;"><u><b>Advanced Economies</b></u></span></div>
<div>Looking at trade volumes, one can see that demand (imports) from advanced economies picked up late 2013 and is growing at a healthy 3.5% pace, but might have slowed a bit more recently. </div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/910b48f9-bd53-4835-afd7-4d471724fe4b.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/7a0dbfb5-58d6-473a-9fab-33d0a34f3469.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
<div><span style="font-size: 21px;"><u><b>Emerging Economies</b></u></span></div>
<div>Emerging economies show a completely different picture. Both export and import volumes have been relatively flat since mid-2014. More recently, imports are tentatively rebounding, but exports remain lackluster.</div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/93be3e44-acda-4335-9c33-86ba3308b97e.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/2cfc5d47-13df-4253-a571-01e5f7afd2e8.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
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<div><span style="font-size: 21px;"><u><b>World</b></u></span></div>
<div>The consolidated world trade statistics show a puzzling divergence: consolidated imports (of which EM account for one-third) is growing at a healthy pace, while consolidated exports (of which EM account for 40%) are roughly flat. Growth of average trade volume is at 1% yoy, with imports growing at 2%yoy and exports flat.</div>
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<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/172168cf-ad43-4448-b33d-56eef6d2ad4f.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/29c9f7b2-917a-4026-a6ca-8b3e34a9100c.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/34fe7ec9-6541-4876-974b-93b024a56da7.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/920c3745-5ba2-4de6-acb8-ecd3d8e5d3fd/42236dae-d360-47aa-ac67-fdebaab54444.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
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US Feb/2016 retail sales weaker than consensushttps://pgrahl.postach.io/post/us-feb-2016-retail-sales-weaker-than-consensus2016-03-15T22:19:51.904000Z2016-03-15T22:06:43ZPaulo Gustavo Grahl, CFA<div><span style="font-size:20.0pt; font-family:"Helvetica","sans-serif"; color:#317EAC">Main takeaways (http://bit.ly/US_Retail_Feb_2016)</span></div>
<div><ul type="disc"><li style="color:#555555; background:white"><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"">February retail sales weaker than consensus; cumulative sales in Dec/Jan revised lower.</span></li><li style="color:#555555; background:white"><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"">Most sell-side analysts revised their consumption estimates down, taking a couple of tenths out of expected GDP growth for 1Q 16 (currently in the 1.4% to 2.5% range).</span></li><li style="color:#555555; background:white"><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"">Softer retail sales can be attributed to tighter financial conditions and some setback in consumer confidence…</span></li><li style="color:#555555; background:white"><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"">…but, in my view, the bulk of the current slowdown continues to be driven by gasoline sales (retail gas prices dropped 10% in February).</span></li></ul></div>
<div><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"; color:#555555">Charts in the link:</span> <a href="http://bit.ly/US_Retail_Feb_2016" shape="rect"><span style="font-size:12.0pt; font-family:"Helvetica","sans-serif"">http://bit.ly/US_Retail_Feb_2016</span></a></div>
Global industrial production and trade resilient despite tightening of financial conditionshttps://pgrahl.postach.io/post/global-industrial-production-and-trade-resilient-despite-tightening-of-financial-conditions2016-03-03T13:29:38.797000Z2016-02-26T12:16:46ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><hr/><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">World trade volumes resilient, despite risk-off in financial markets.</span></li><li>World trade volumes growing at around 2.5% per year.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Global industrial production growing at 1%, but the recent slowdown in growth is due to US; ex. US, global IP is growing at 1.5%-2%.</span></li></ul><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Netherlands Bureau for Economic Analysis (CPB - Centraal Planbureau) has released world trade volume and industrial production data for December. </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 1a) Volume of world</i> trade <i>(exports & imports, seasonally adjusted)</i></b></span></div><hr/><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/49aa14c6-a3b8-43c4-b8ec-4cf02126f0ad.png" style="height: auto;"/></div>
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<div><i><b>Chart 1b) Volume of world trade (seasonally adjusted)</b></i></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/561806d7-2cae-42fa-8de6-6f9955765cc0.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below zoom in to the most recent four years to highlight the behavior of trade volumes at margin.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Export trend growth in the last two years slowed from 2.4% to 2.1% (from July to September) but rose to 3.7% in December.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Import trend growth slowed from 1.8% to 1.6% (from July to September) but moved up to 2.2% in December.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 2a) Volume of world </i>exports<i> (seasonally adjusted, last 4 years)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/ea599339-d260-458f-a5df-d8d6ec511988.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><br/></i></b></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 2b) Volume of world </i>imports<i> (seasonally adjusted, last 4 years)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/1f00fccd-de57-4728-8d56-5297065e943f.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 2c) Volume of world </i>imports<i> ex ASIA (seasonally adjusted, last 4 years)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/561a0892-3ce5-44c4-b1bb-583f4917a992.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 3a) World Industrial Production (seasonally adjusted)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/bbb4f746-931f-4045-b54d-d9072a0d2686.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 3b) World Industrial Production ex US (seasonally adjusted)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/8aa1e90b-6a78-4816-b423-147dc6bd6d16.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 3b) World Industrial Production (seasonally adjusted)</i></b></span></div>
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<div><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/33eaac70-dbab-4729-925b-0b3e3fc45831/1dc53387-621a-4dc3-ab41-b4176eeb64ae.png" style="height: auto;"/><br/></b></i></div>
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US inflation up in January, but soft patch likely in the near term in tandem with oil priceshttps://pgrahl.postach.io/post/us-inflation-up-in-january-but-soft-patch-likely-in-the-near-term-in-tandem-with-oil-prices2016-03-03T13:29:36.787000Z2016-02-19T16:26:15ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Headline and core inflation both up in January.</li><li>Sticky-price CPI (a sign of anchored expectations) is at 2.5%.</li><li>Inflation momentum has been around 2.2% for one year.</li><li>If oil prices continue to move lower, inflation (headline and core) will likely soften in the near term, mimicking the path observed in late 2014 / early 2015; if this does not happen it could signal strong underlying price pressures.</li><li>Some measures of inflation expectations are catching down with inflation compensation -- this was a key concern in the last FOMC meeting.</li></ul><div><br/></div>
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<div><b>Headline and core inflation ticked up again...</b></div>
<div><b>(headline is a base effect since overall prices are almost flat... but core prices are trending up)</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/b5cd2061-86c9-4341-88de-ba1fe8e3c2a3.png" style="height: auto;"/></div>
<div><b>...and inflation momentum hovering around 2.2% for one year now</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/419a8c34-ae70-4f3f-a558-41b22e04378b.png" style="height: auto;"/></div>
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<div>The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, but the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has, <u>so far,</u> barely dented the trend in core inflation (except for the 2H 2014 period, when core CPI softened a bit in tandem with the sharp drop in energy). </div>
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<div><b>Headline and core inflation could soften again reflecting lower oil prices, repeating what happened in late 2014 early 2015.</b></div>
<div><b>(if it doesn't, it could imply stronger underlying price pressures...)</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/b7fa1823-0125-48e5-ae69-8964ce19cfdf.png" style="height: auto;"/></div>
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<div><b>Core goods are almost flat, but core services inflation is rising and reached 3.0% yoy. </b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/3a073fc3-bed3-4e87-8b73-cb523fb23d23.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Sticky-Price CPI (a sign of anchored expectations)</span> <span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">is high</span></b></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "<i><u>appear to incorporate expectations about future inflation to a greater degree than flexible prices</u></i>".</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/c0bb330d-710a-4fb1-a0c7-6736f4ab1080.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Market-based inflation expectations and compensation: this is key for the FOMC!</span></b></div>
<div><b>Some survey measures are moving down -- doves will worry. </b></div>
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<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/b3bbb712-f309-4fdf-827c-bc28b1398114.png" style="height: auto;"/><br/></b></div>
<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/53d0760b-9521-47ae-9272-8b363a474f14/a4af2d80-15e1-45ae-a942-f2b2b5207af4.png" style="height: auto;"/><br/></b></div>
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US industrial activity better than expected in January; but overall picture is unchangedhttps://pgrahl.postach.io/post/us-industrial-activity-better-than-expected-in-january-but-overall-picture-is-unchanged2016-03-03T13:29:36.500000Z2016-02-17T17:07:47ZPaulo Gustavo Grahl, CFA<div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong>Main takeaways:</strong></span></div><ul><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Industrial production rose 0.9%mom in January (above mkt consensus), but December decline was revised even lower to -0.7%mom (from -0.4%).</span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Non-energy IP rose 0.5% and core manufacturing increased 0.3% in January.</span></li><li>Weakness in oil sector and strong dollar remain a concern for industry activity.</li></ul><div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong><br/></strong></span></div><hr/><div>The table below compares total IP, Manufacturing production, Core manufacturing and IP excluding energy. All have been weak in recent months, but the energy sector has had a material negative impact on total industrial activity. Excluding energy, one can see a slowdown in production since late 2014 -- but the overall picture still seems aligned with the weak trend growth observed since 2010.</div>
<div><br/></div><table style="border-collapse: collapse; margin-left: 0px;table-layout:fixed;width:77.03703703703704%;"><tr><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:48.824786324786324%;"><div style="text-align: center"><u><b>Production level and growth rates</b></u></div></td><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:51.06837606837607%;"><div style="text-align: center"><u><b>Capacity utilization</b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/82e50c7b-0573-4d37-a95b-6dc848a9dfbe.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/5dfdb977-cac0-467c-ab03-38194ebb2740.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/ebbcdc08-f3e7-4157-854b-974546c4aa74.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/cd2ca71f-1ea9-4fbb-a3b5-267ffbf7528c.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/5e41c56a-1eb3-40d0-8432-fc709d9dbb9c.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/0f68406f-4e03-4bc0-9ab3-2411e8b52363.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/d30dad01-23b3-4e93-8b3f-4cd0ca028dcf.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><br/></div></td></tr></table><div><br/></div><hr/><div>What about the upcoming months? Can we expect any improvement?</div>
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<div>The Markit PMI has converged to the (weak) ISM, and both suggest there's no upside for industry in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/9181781a-74c3-405b-b62f-bc65e53a97df.png" style="height: auto;"/></div>
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<div>A simple linear regression with the ISM makes this point clear.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/5944aa67-b912-486e-ad2c-9ce18e7533b9.png" style="height: auto;"/></div>
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<div>The <span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Conference Board leading indicators are also catching down with weak industrial activity.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/fcd3b796-e0ba-4048-b11d-1b6dfc51d3ae.png" style="height: auto;"/></div>
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<div>The diffusion index of industrial production tends to lead actual production by a few months, and it shows a tentatively better picture for IP.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/293a389d-879b-40bb-942f-8657654bf1b0.png" style="height: auto;"/></div>
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<div>Weakness in the oil sector and USD strengthening continue to weight on industrial activity. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/eb1b7e5c-d27a-42ed-bd49-1a9703a0de6a.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/20afd90e-a9b1-45af-8278-b3686458c1f8/8bd6cd14-7bad-404f-8067-53770f4aee67.png" style="height: auto;"/></div>
US Univ. of Michigan Sentiment: Lowest expected long term inflation rate since this question was first asked in 1979!https://pgrahl.postach.io/post/us-univ-of-michigan-sentiment-lowest-expected-long-term-inflation-rate-since-this-question-was-first-asked-in-19792016-03-03T13:29:33.698000Z2016-02-12T20:27:38ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li>Lowest expected long term inflation rate since this question was first asked in 1979!</li><li>Declining equity prices, weak global economy, ..., have become old news -- mentioned by 1-in-5 among rich households (down from 1-in-3 in Jan and last Sept).</li><li>Current level of Sentiment is associated with real consumption growing at 3.1%.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Historical episodes show that real consumption grows in the 2.2%-4.0% range while Sentiment is near current levels, with no episode of real growth below 2%.</span></li></ul><div><hr/></div>
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<div><u><i>Additional highlights in the report:</i></u></div><ul><li>"February decline was due to a less favorable outlook for the economy during the year ahead"</li><li>"consumers viewed their personal financial situations somewhat more favorably"</li><li>"consumers anticipated the lowest long term inflation rate since this question was first asked in the late 1970".</li><li>"The proporstion of households that reported an improved financial situation rebounded to 45% in early February, the highest level in six months"</li><li>"when asked about their financial prospects over the next five years, 54% anticiated improved finances, while just 10% expected worsening finances over the longer term, <i>the best reading since 1984 </i>"</li><li>"Although declining equity prices, weak global economy, and sagging exports have continued, they have become old news -- mentioned by one-in-five among households with income in the top third in February, down from one-in-three last month (and in Aug/15)"</li><li>"fewest consumers in two years to report recent improvement in the economy"</li><li>"fewest consumers since Aug 2014 to anticipate good times in the economy during the year ahead"</li><li>"consumers thought that unemployment would inch upward by the end of 2016"</li><li>"Buying plans remained favorable due to discounted prices and low interest rates"</li></ul><div><br/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in February at 90.7, down 1.3 points from the January estimate.</span><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"> </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0180816f-5e95-4790-9ed3-1a6ccb82b0b3/4d428d86-981c-4caa-8f8c-5e70aab4ee8a.png" style="height: auto;"/><br/></span></div>
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<div><u><i><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking closer at the relationship between Michigan Sentiment and household consumption:</span></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 3.1%.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.2%-4.0% range, with a few outliers above this range and no episode of real consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0180816f-5e95-4790-9ed3-1a6ccb82b0b3/cc9ed5d5-d8af-44a1-94b0-31f9721631db.png" style="height: auto;"/><br/></span></div>
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<div>Lowest expected long term inflation rate since this question was first asked in 1979!</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0180816f-5e95-4790-9ed3-1a6ccb82b0b3/dff01e85-236e-4d98-ae09-c94512179fa9.png" style="height: auto;"/></div>
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US: tight financial conditions have not (yet?) shaken retail saleshttps://pgrahl.postach.io/post/us-tight-financial-conditions-have-not-yet-shaken-retail-sales2016-03-03T13:29:34.418000Z2016-02-12T19:20:25ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li>January retail sales were a positive surprise.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The numbers:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">advance retail sales increased 0.2%mom, a bit better than market consensus; December was revised up from -0.1% to 0.2%mom gain;</span></li><li>excluding gasoline stations, sales increased 0.4%mom and December was revised from flat to +0.2%;</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">control group increased 0.6%mom <i>well above </i>+0.3% consensus, more than offsetting December's -0.3%mom report.</span></li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Trend growth remains unchanged:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of total retail sales ex gasoline stations increased from 4.6% to 4.8%.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of the 'control group' remained at 3.3%. </span></li><li>Both trends are very close to the 4-year growth pace: consumers remain resilient!</li><li>Recall that retail prices have trended slightly down -- so the above growth rates understate volume growth!</li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Despite all the headlines of an inventory problem in the retail sector, inventory-to-sales ratio remained roughly flat (excluding gasoline).</span></li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The overall trend for retail sales excluding gasoline at gas stations <i>increased</i> to 4.8% in the last 12 months (from 4.6%). This trend is broadly unchanged compared to the longer (4 year) trend of 4.5% nominal growth. </span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/afb6a773-6a71-4f1d-a8f1-dd71ed6c023f.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/78e7f29a-ce11-4815-8ccc-574bb79b0d03.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below compares total retail sales with retail excluding gasoline sales. It is clear that most of the slowdown in retail sales since mid-2015 was due to falling gasoline prices. Moreover, even considering gasoline, sales moved up in Nov/Dec/Jan. </span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/d8e782dc-28a5-40e6-bc1a-8cf8d237743f.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking at the "control group" (total retail excluding auto dealers, bldg materials, gas stations) a similar growth picture emerges: 3.3% growth in the last year and 3.0% in the last 4 years.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/bba3ee88-35c9-4e83-b1ed-518686665024.png" style="height: auto;"/></div>
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<div>Excluding residual gasoline sales that are inside the control group (fuel dealers) shows a better picture, with adjusted-control sales growing faster than the number reported. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/411cf66c-1deb-46ec-ab52-270ddd702ab3.png" style="height: auto;"/></div>
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<div>Also, it is important to recall that (control group) retail prices have been trending down in the last year...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/42ee237d-adf7-4e4f-8178-3073f3ac5256.png" style="height: auto;"/> </div>
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<div>...which results in a very healthy growth rate in retail <b><i>volumes. </i></b></div>
<div><i><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/e92a9f37-21ce-4ba1-a907-9bc2e333c9f1.png" style="height: auto;"/><br/></i></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><u style="font-weight: bold;">Inventories:</u> stable if one excludes gasoline sales (latest: December)</span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/3e3736c5-0eeb-403e-99b4-b3ac88260be0.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/b6c240c5-366b-4615-8f00-899eca82dee1.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Extra charts</b></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below show retail and food services by kind of business. The red line is an index in log (averages zero in the period) so that a number 10 in the scale means sales are 10% higher than the period average. The red dashed line is the trend in the last 12 months and the blue bars (right scale) are the monthly percentage change. The headline is how the slope of the red dashed line has changed compared to last two months.</span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.4% to 7.2% to 7.6%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/26950065-8662-4019-9b62-05d72851ef51.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.8% to 6.5% to 5.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/41c9f001-b255-41a7-b0f1-e7d15c2675c6.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from -1.8% to -2.6% to -2.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/ca8dada6-7ff0-4bf9-8ea0-53fff7dd75e9.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.0% to 3.9% to 5.3%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/1ee2536d-c4d8-4da0-b34b-f275fa8c0959.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 1.8% to 1.5% to 1.7%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/ed37917c-c839-4160-945f-19f4aaf3a018.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.8% to 4.4% to 4.5%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/0561b438-40ce-4d8c-b5d3-5fff449b076d.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from -11.6% to -8.8% to -9.3%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/d0e4e634-46bf-4a66-8621-0880d55b1967.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 1.8% to 1.7% to 1.6%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/f5e328b4-cc09-445b-88a1-b5b7a86e4c48.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 7.0% to 8.4% to 8.2%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/0be703bb-b088-48bf-8679-56213e8677fe.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 2.9% to 2.1% to 2.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/9e822639-5c4a-457b-8873-492722cb99e6.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 2.9% to 2.9% to 2.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/b746450e-f931-4e31-8962-a8dd36cd9955.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 7.2% to 7.2% to 7.3%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/0883b661-edc5-4ed8-8779-2990e85435d5.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 5.9% to 6.4% to 6.3%</u></i></b></span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/bb36f4df-e906-4870-b498-838e5583366f/66ab3eb4-f359-456a-af6d-7d50c2412598.png" style="height: auto;"/></div>
(Update) Energy crisis and its impact on the US economyhttps://pgrahl.postach.io/post/update-energy-crisis-and-its-impact-on-the-us-economy2016-03-03T13:29:28.585000Z2016-01-21T14:35:09ZPaulo Gustavo Grahl, CFA<div>The Q3 2015 GDP data by industry was released today. Below I've updated the two charts showing value added and gross output for the mining sector. It shows the collapse of the sector continued well into Q3.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/36f92127-2f41-486a-bd84-ced68319d0da.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/bc6e38d6-63de-4115-aa77-107b585a61e6.png" style="height: auto;"/></div>
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<div>I have compiled some key numbers of the mining sector (a broad classification, which includes oil and gas) to give some color on the importance of the sector to the broad US economy. The overall point is that the sector has collapsed in 2015 and will likely continue to contract in 2016. Despite the collapse in 2015, the broader economy has, <u><i>so far</i>,</u> shown resilience to the crisis in the sector: GDP up by 2%, 2.6 million jobs created (220k/month average), consumer confidence close to highs, etc.</div>
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<div>The good news is that the size of the mining sector compared to the overall economy has shrunk substantially. Therefore a similar sized collapse in 2016 would have a smaller impact in the broad economy. </div>
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<div>The bad news is that contagion (HY market and overall tightening in financial conditions), assuming the level of stress in the market continues, can be enough to slowdown the economy substantially.</div>
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<div><span style="color: rgb(28, 51, 135);"><b>Main takeaways:</b></span></div><ul><li>US mining sector (which encompasses the oil and gas sector):</li><li style="list-style: none; display: inline"><ul><li>investment is 0.4% of GDP (down from 0.9%);</li><li>value added is 1.9% of GDP (down from 2.7%);</li><li>gross output is 2.5% of GDP (down from 4.1%);</li><li>employment is 0.5% of total employment (down from 0.6%);</li><li>employment is 730 thousands (down from 860 thousands).</li></ul></li><li>Real activity:</li><li style="list-style: none; display: inline"><ul><li>investment fell 45% in three quarters since 2014 (-55% annualized)</li><li>this subtracted 0.25 percentage points from the 2.15% GDP growth observed in the last four quarters to Q3 2015.</li></ul></li><li>Spillover:</li><li style="list-style: none; display: inline"><ul><li>a rough calculation (based on employment in the oil-producing vs non oil states) suggests that for each job lost in the mining sector another one was lost outside the sector (one-to-one spillover);</li><li>if mining employment goes back to 500-550 thousands observed before the boom (2004) that would imply an additional loss of 180k-230k jobs;</li><li>assuming a one-to-one spillover that would imply total job losses in the 360k to 460k range; wage income loss (based on an average annual individual income of $57.5 thousands) would amount to a mere 0.1% of GDP.</li></ul></li><li>Debt of energy/mining companies:</li><li style="list-style: none; display: inline"><ul><li>Total debt of the energy and mining companies in the S&P500 is $410bn (out of which $40bn is short-term); </li><li>total debt of energy companies with coverage ratio below 2 is $225bn;</li><li>about $100bn debt of "really junk" companies (rating below CCC+);</li><li>median debt to equity ratio for the oil sector is around 50% (up from 40% in 2013), with 10 with debt/equity ratio above 80; median debt/equity for the S&P is 80 (up from 60);</li><li>cashflow from operating activities (for S&P500 oil and mining companies) dropped from $230bn in 2014 to $155bn in 2015; this compares to gross operating surplus (from BEA data) going from around $300bn in 2014 to $200bn in 2015.</li></ul></li><li>HY debt and financial conditions</li><li style="list-style: none; display: inline"><ul><li>Outstanding HY debt is $1.4tn, out of which $420bn already rated CCC+ or below; (<a href="http://www.evernote.com/l/AJF9r2ZtgGxNSbqzTBOQMQxSlj2pvZj897M/">see Some (random) comments on US HY</a>)</li><li>gross financing needs in the HY market is around $130bn in 2016;</li><li>risk in the oil/mining sector is spreading to other HY segments and to the broad financial conditions (see <a href="http://www.evernote.com/l/AJEt6Np3rudBVLIW7fAItNhk0mpW2AP5KcA/">US Financial Stress Index - JGP</a>)</li><li>broad financial conditions are now as tight as they were last August when I estimated its impact in the broad economy could be as large as cutting growth to 0.7% to 1.2% range withing 6-9 months (see <a href="http://www.evernote.com/l/AJGCaUO_zjJDaJ3RfyuhxhTWPgrn1Iflqak/">What is the impact of tightening financial conditions into growth?</a>).</li></ul></li></ul><div><br/></div>
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<div><span style="font-size: 19px;"><u><span style="color: rgb(28, 51, 135);"><b>How big is the oil/mining sector?</b></span></u></span></div>
<div>Investment on mining exploration, shafts, and wells structures peaked at 30% of the total nonresidential investment in structures, but has already dropped to 15% (Obs: this sector is broader than just the oil & gas).</div>
<div>However, investment on the sector is much smaller when compared with overall investment or GDP. Mining exploration, shafts, and wells structures account for 2.5% of total investment (down from 5.7%) and for 0.4% of GDP (down from 0.9%).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/b3005da5-9097-49be-85e3-44392e2d1327.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/4734a40f-fde2-4709-bec7-c1b80ba87dc3.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/b2084bbe-aeed-436f-877a-6831eab88c09.png" style="height: auto;"/></div>
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<div>Both the increase since early 2000 and the recent drop are not a merely a price effect -- when comparing quantities it is also clear that the volume of investment in the sector outpace the overall volume of nonresidential investment in structures from 2000 to 2011 and has now underperformed materially since 2014.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/5d592f74-1872-4052-8d47-f9d02ebc8842.png" style="height: auto;"/></div>
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<div>The chart below shows that the high frequency data on rig count is a good proxy for the investment in the sector; and it suggests further downside in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/5aa5fc2b-a6d0-4685-b954-2af49158fc1a.png" style="height: auto;"/></div>
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<div>GDP measured via the <i>product approach</i> is released with a delay and the most recent data refers to Q2 2015. Data is only available (quarterly) for the mining sector, which is broader than the oil sector. Value added in the <i>oil and gas extraction</i> sector accounts for about two-thirds of the broader <i>mining</i> sector. The chart below shows that the value added by the mining sector amounts to 1.9% of GDP, down 0.8 percentage points from the 2.7% peak in mid-2014. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/b3cc3555-4b34-4a0b-9917-34b417dbba7a.png" style="height: auto;"/></div>
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<div>But value added does not account for the sector spending on intermediate inputs (materials, services). For the mining industry, intermediate inputs are roughly 45% of the value added (a bit lower for the oil sector alone: 35%). The chart shows that gross output of the mining sector amounts to 2.5% of GDP, down 1.6 percentage points from the recent peak in mid-2014. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/7a7a48fd-ad00-4d88-8a30-5c2e056cac3f.png" style="height: auto;"/></div>
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<div><span style="font-size: 19px;"><u><b><span style="color: rgb(28, 51, 135);">Employment</span></b></u></span></div>
<div>There are currently around 185 thousands employed in the oil and gas extraction sector, down from 200 thousands by late 2014. This represents a mere 0.1% of total employment. Even though the oil and gas industry accounts for about two-thirds of gross output in the mining sector (and two-thirds of value added) it accounts for a much lower share of total employment (25%). Total employment in the mining sector fell from 860 thousands to 730 thousands in one year (and now accounts for 0.5% of total employment). Before the boom, mining employment was 500 thousands (0.4% of total employment).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/67a7c3bd-8ceb-4811-97de-6f37b53d3499.png" style="height: auto;"/></div>
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<div>Another way of looking at the impact of the mining crisis in employment and its potential spillovers is to split the US states in oil producing vs non-oil states. </div>
<div>The chart below clearly shows that employment growth in the oil producing states has slowed since late 2014. Total employment in the oil producing states, however, is much smaller than the overall employment in non-oil states (25 million vs 118mn). </div>
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<div>If employment in the oil producing states (outside of the mining sector) had moved in tandem with employment in the non-oil states, then employment in the non-mining sector of the oil states would be around 140 thousands <i>higher</i> than what is currently observed (or an average of 12k/month). Comparing this with the loss of employment in the mining sector (130 thousands) one can <u>guess</u> that the spillover to employment in other sectors was large (about one-to-one). The good news is that the counterfactual (i.e., the employment growth without the oil / mining crisis) would have been 2.9 million in 2015, rather than the 2.6 million reported.</div>
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<div>If employment in the mining sector goes back to levels before the boom, around 500-550 thousands (depending on whether the low is measured in absolute or relative to total employment), that would imply an additional loss of 180k-230k jobs on top of the 130k loss reported in 2015. </div>
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<div>Assuming the same spillover reported above, that would imply total job losses in the 360k-460k range. If this loss happens over a one-year period it would reduce job growth from the 2.9 million pace (counterfactual) to 2.4 million (substantial, but still a healthy 200k/month monthly payroll !!).</div>
<div>Even doubling the spillover (2 jobs for each job loss in the mining sector), the outcome would be job growth of 2.2 million (185k/month) !</div>
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<div><u>Note:</u></div>
<div style="margin-left:40px;">Off course it all depends on the counterfactual job growth of 2.9 million / year, which is 2% yoy growth. If the counterfactual (or underlying growth, not related to the mining direct and/or indirect impact) slows down to, say, 1.5% yoy, then average monthly payroll would be in the 120k-140k per month ballpark.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/15f6ea7e-36eb-4220-9979-b397e399b8ef/7a055cf1-9f60-477a-ad74-b218f5abb0fe.png" style="height: auto;"/></div>
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<div><u><span style="font-size: 19px;"><span style="color: rgb(28, 51, 135);"><b>Income</b></span></span></u></div>
<div>The average mining worker earns $1250/week and works 46 weeks/year, taking home an annual pay of $57,500. If, as assumed above, 200 thousands mining workers lose a job, that will represent a loss of $11.5bn in total wages. Even accounting for the one-to-one spillover mentioned above, the total wage loss would amount to $23.6bn, a mere 0.1% of GDP.</div>
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US: inflation soft patch likely in the near term as oil prices move lowerhttps://pgrahl.postach.io/post/us-inflation-soft-patch-likely-in-the-near-term-as-oil-prices-move-lower2016-03-03T13:29:27.741000Z2016-01-20T17:11:37ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Headline and core inflation both ticked up in December, but were a bit below market consensus.</li><li>Sticky-price CPI (a sign of anchored expectations) ticked down but is still at 2.5%.</li><li>Inflation momentum softened from 2.4% to 1.9%.</li><li>If oil prices continue to move lower, inflation (headline and core) will likely soften in the near term, mimicking the path observed in late 2014 / early 2015.</li></ul><div><br/></div>
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<div><b>Headline and core inflation ticked up...</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/ce943165-03ce-402f-b3cf-c7ee6bdb4a65.png" style="height: auto;"/></div>
<div><b>...but inflation momentum softened back to 2%</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/78870450-9930-42c8-9c18-8f378dfcf7ad.png" style="height: auto;"/></div>
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<div>The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, but the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has, <u>so far,</u> barely dented the trend in core inflation. </div>
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<div><b>Headline and core inflation could soften again reflecting lower oil prices, repeating what happened in late 2014 early 2015</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/70035264-2ebf-4063-b549-20376504417c.png" style="height: auto;"/></div>
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<div><b>But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.4% <i>lower</i> than a year ago while core services are 2.9% <i>higher</i>. </b></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Sticky-Price CPI (a sign of anchored expectations)</span> <span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">is high</span></b></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "<i><u>appear to incorporate expectations about future inflation to a greater degree than flexible prices</u></i>".</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/2ecdb4c4-ee43-44e0-a70a-1ccee5b388cb.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Market-based inflation expectations and compensation: this is key for the FOMC!</span></b></div>
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<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/3ea4ec8d-0f6e-42da-a24a-5fc450f69eb0.png" style="height: auto;"/><br/></b></div>
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<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2b284647-9012-4002-b5ea-934f685b57a8/cc1a51a5-151b-4918-8dfd-0f956ef136ac.png" style="height: auto;"/><br/></b></div>
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Energy crisis and its impact on the US economyhttps://pgrahl.postach.io/post/energy-crisis-and-its-impact-on-the-us-economy2016-03-03T13:29:26.779000Z2016-01-19T11:29:48ZPaulo Gustavo Grahl, CFA<div>I have compiled some key numbers of the mining sector (a broad classification, which includes oil and gas) to give some color on the importance of the sector to the broad US economy. The overall point is that the sector has collapsed in 2015 and will likely continue to contract in 2016. Despite the collapse in 2015, the broader economy has, <u><i>so far</i>,</u> shown resilience to the crisis in the sector: GDP up by 2%, 2.6 million jobs created (220k/month average), consumer confidence close to highs, etc.</div>
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<div>The good news is that the size of the mining sector compared to the overall economy has shrunk substantially. Therefore a similar sized collapse in 2016 would have a smaller impact in the broad economy. </div>
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<div>The bad news is that contagion (HY market and overall tightening in financial conditions), assuming the level of stress in the market continues, can be enough to slowdown the economy substantially.</div>
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<div><span style="color: rgb(28, 51, 135);"><b>Main takeaways:</b></span></div><ul><li>US mining sector (which encompasses the oil and gas sector):</li><li style="list-style: none; display: inline"><ul><li>investment is 0.4% of GDP (down from 0.9%);</li><li>value added is 1.9% of GDP (down from 2.7%);</li><li>gross output is 2.5% of GDP (down from 4.1%);</li><li>employment is 0.5% of total employment (down from 0.6%);</li><li>employment is 730 thousands (down from 860 thousands).</li></ul></li><li>Real activity:</li><li style="list-style: none; display: inline"><ul><li>investment fell 45% in three quarters since 2014 (-55% annualized)</li><li>this subtracted 0.25 percentage points from the 2.15% GDP growth observed in the last four quarters to Q3 2015.</li></ul></li><li>Spillover:</li><li style="list-style: none; display: inline"><ul><li>a rough calculation (based on employment in the oil-producing vs non oil states) suggests that for each job lost in the mining sector another one was lost outside the sector (one-to-one spillover);</li><li>if mining employment goes back to 500-550 thousands observed before the boom (2004) that would imply an additional loss of 180k-230k jobs;</li><li>assuming a one-to-one spillover that would imply total job losses in the 360k to 460k range; wage income loss (based on an average annual individual income of $57.5 thousands) would amount to a mere 0.1% of GDP.</li></ul></li><li>Debt of energy/mining companies:</li><li style="list-style: none; display: inline"><ul><li>Total debt of the energy and mining companies in the S&P500 is $410bn (out of which $40bn is short-term); </li><li>total debt of energy companies with coverage ratio below 2 is $225bn;</li><li>about $100bn debt of "really junk" companies (rating below CCC+);</li><li>median debt to equity ratio for the oil sector is around 50% (up from 40% in 2013), with 10 with debt/equity ratio above 80; median debt/equity for the S&P is 80 (up from 60);</li><li>cashflow from operating activities (for S&P500 oil and mining companies) dropped from $230bn in 2014 to $155bn in 2015; this compares to gross operating surplus (from BEA data) going from around $300bn in 2014 to $200bn in 2015.</li></ul></li><li>HY debt and financial conditions</li><li style="list-style: none; display: inline"><ul><li>Outstanding HY debt is $1.4tn, out of which $420bn already rated CCC+ or below; (<a href="http://www.evernote.com/l/AJF9r2ZtgGxNSbqzTBOQMQxSlj2pvZj897M/">see Some (random) comments on US HY</a>)</li><li>gross financing needs in the HY market is around $130bn in 2016;</li><li>risk in the oil/mining sector is spreading to other HY segments and to the broad financial conditions (see <a href="http://www.evernote.com/l/AJEt6Np3rudBVLIW7fAItNhk0mpW2AP5KcA/">US Financial Stress Index - JGP</a>)</li><li>broad financial conditions are now as tight as they were last August when I estimated its impact in the broad economy could be as large as cutting growth to 0.7% to 1.2% range withing 6-9 months (see <a href="http://www.evernote.com/l/AJGCaUO_zjJDaJ3RfyuhxhTWPgrn1Iflqak/">What is the impact of tightening financial conditions into growth?</a>).</li></ul></li></ul><div><br/></div>
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<div><span style="font-size: 19px;"><u><span style="color: rgb(28, 51, 135);"><b>How big is the oil/mining sector?</b></span></u></span></div>
<div>Investment on mining exploration, shafts, and wells structures peaked at 30% of the total nonresidential investment in structures, but has already dropped to 15% (Obs: this sector is broader than just the oil & gas).</div>
<div>However, investment on the sector is much smaller when compared with overall investment or GDP. Mining exploration, shafts, and wells structures account for 2.5% of total investment (down from 5.7%) and for 0.4% of GDP (down from 0.9%).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/06879a63-e2fd-4a97-9e3e-e9804c34cf69.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/dbc33d83-46f7-4cb8-a7be-73057a07d6a3.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/11754365-5965-4859-be7f-b55f68c78181.png" style="height: auto;"/></div>
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<div>Both the increase since early 2000 and the recent drop are not a merely a price effect -- when comparing quantities it is also clear that the volume of investment in the sector outpace the overall volume of nonresidential investment in structures from 2000 to 2011 and has now underperformed materially since 2014.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/a41ff9c3-38cf-49cf-876c-e59536f51f52.png" style="height: auto;"/></div>
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<div>The chart below shows that the high frequency data on rig count is a good proxy for the investment in the sector; and it suggests further downside in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/0a6da8ae-2ea6-40e7-8c95-809c5a10b28c.png" style="height: auto;"/></div>
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<div>GDP measured via the <i>product approach</i> is released with a delay and the most recent data refers to Q2 2015. Data is only available (quarterly) for the mining sector, which is broader than the oil sector. Value added in the <i>oil and gas extraction</i> sector accounts for about two-thirds of the broader <i>mining</i> sector. The chart below shows that the value added by the mining sector amounts to 1.9% of GDP, down 0.8 percentage points from the 2.7% peak in mid-2014. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/a0c7573d-1a2a-46ec-b13f-f07b1661af95.png" style="height: auto;"/></div>
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<div>But value added does not account for the sector spending on intermediate inputs (materials, services). For the mining industry, intermediate inputs are roughly 45% of the value added (a bit lower for the oil sector alone: 35%). The chart shows that gross output of the mining sector amounts to 2.5% of GDP, down 1.6 percentage points from the recent peak in mid-2014. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/371093b2-a0b3-4275-a3ba-9da7c210ed30.png" style="height: auto;"/></div>
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<div><span style="font-size: 19px;"><u><b><span style="color: rgb(28, 51, 135);">Employment</span></b></u></span></div>
<div>There are currently around 185 thousands employed in the oil and gas extraction sector, down from 200 thousands by late 2014. This represents a mere 0.1% of total employment. Even though the oil and gas industry accounts for about two-thirds of gross output in the mining sector (and two-thirds of value added) it accounts for a much lower share of total employment (25%). Total employment in the mining sector fell from 860 thousands to 730 thousands in one year (and now accounts for 0.5% of total employment). Before the boom, mining employment was 500 thousands (0.4% of total employment).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/c109d7d2-bce4-440a-8557-e87cb53e0e45.png" style="height: auto;"/></div>
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<div>Another way of looking at the impact of the mining crisis in employment and its potential spillovers is to split the US states in oil producing vs non-oil states. </div>
<div>The chart below clearly shows that employment growth in the oil producing states has slowed since late 2014. Total employment in the oil producing states, however, is much smaller than the overall employment in non-oil states (25 million vs 118mn). </div>
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<div>If employment in the oil producing states (outside of the mining sector) had moved in tandem with employment in the non-oil states, then employment in the non-mining sector of the oil states would be around 140 thousands <i>higher</i> than what is currently observed (or an average of 12k/month). Comparing this with the loss of employment in the mining sector (130 thousands) one can <u>guess</u> that the spillover to employment in other sectors was large (about one-to-one). The good news is that the counterfactual (i.e., the employment growth without the oil / mining crisis) would have been 2.9 million in 2015, rather than the 2.6 million reported.</div>
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<div>If employment in the mining sector goes back to levels before the boom, around 500-550 thousands (depending on whether the low is measured in absolute or relative to total employment), that would imply an additional loss of 180k-230k jobs on top of the 130k loss reported in 2015. </div>
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<div>Assuming the same spillover reported above, that would imply total job losses in the 360k-460k range. If this loss happens over a one-year period it would reduce job growth from the 2.9 million pace (counterfactual) to 2.4 million (substantial, but still a healthy 200k/month monthly payroll !!).</div>
<div>Even doubling the spillover (2 jobs for each job loss in the mining sector), the outcome would be job growth of 2.2 million (185k/month) !</div>
<div> </div>
<div><u>Note:</u></div>
<div style="margin-left:40px;">Off course it all depends on the counterfactual job growth of 2.9 million / year, which is 2% yoy growth. If the counterfactual (or underlying growth, not related to the mining direct and/or indirect impact) slows down to, say, 1.5% yoy, then average monthly payroll would be in the 120k-140k per month ballpark.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/04b66e26-bc69-4ad5-b65f-4d3fe285c471/15555a6d-8737-4066-b340-6ea9b1617ee2.png" style="height: auto;"/></div>
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<div><u><span style="font-size: 19px;"><span style="color: rgb(28, 51, 135);"><b>Income</b></span></span></u></div>
<div>The average mining worker earns $1250/week and works 46 weeks/year, taking home an annual pay of $57,500. If, as assumed above, 200 thousands mining workers lose a job, that will represent a loss of $11.5bn in total wages. Even accounting for the one-to-one spillover mentioned above, the total wage loss would amount to $23.6bn, a mere 0.1% of GDP.</div>
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<div> </div>
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US industrial activity remained weak in Decemberhttps://pgrahl.postach.io/post/us-industrial-activity-remained-weak-in-december2016-03-03T13:29:23.140000Z2016-01-15T19:47:40ZPaulo Gustavo Grahl, CFA<div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong>Main takeaways:</strong></span></div><ul><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Industrial production fell 0.4%mom in December, and November decline was revised down to -0.9%mom (from -0.6%).</span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Non-energy IP and core manufacturing were both close to <u>flat</u> for the second month in a row.</span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">ISM / Markit surveys and Conference Board leading indicator do not suggest any rebound for industry in the near term.</span></li><li>Weakness in oil sector and strong dollar remain a concern for industry activity.</li></ul><div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong><br/></strong></span></div><hr/><div>Industrial production fell 0.6% mom in November, again largely due to energy. Non-energy industrial production was flat in November.</div>
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<div>The table below compares total IP, Manufacturing production, Core manufacturing and IP excluding energy. All have been weak in recent months, but the energy sector has had a material negative impact on total industrial activity. Excluding energy, one can see a slowdown in production since late 2014 -- but the overall picture still seems aligned with the trend growth observed since 2010.</div>
<div><br/></div><table style="border-collapse: collapse; margin-left: 0px;table-layout:fixed;width:77.03703703703704%;"><tr><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:48.824786324786324%;"><div style="text-align: center"><u><b>Production level and growth rates</b></u></div></td><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:51.06837606837607%;"><div style="text-align: center"><u><b>Capacity utilization</b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/3f9eead1-c943-4f6c-8247-77d49185b7b6.png" style="height:auto;" width="436"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/0a7f60fe-ec54-411f-810f-bf8b8e30a7b7.png" style="height:auto;" width="434"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/35ebabd9-063a-42df-8f0a-cc3cdda43314.png" style="height:auto;" width="436"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/7eef2e97-40aa-4b56-8fd9-8473307e13f5.png" style="height:auto;" width="438"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/1ff3f331-02b4-4eec-aae7-f4e74dce4141.png" style="height:auto;" width="438"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/1b313fa7-d4cb-4dd0-b274-1f00be355165.png" style="height:auto;" width="439"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/bfdfc7a8-ee79-4545-8286-d06ea8f11755.png" style="height:auto;" width="424"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><br/></div></td></tr></table><div><br/></div><hr/><div>What about the upcoming months? Can we expect any improvement?</div>
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<div>The Markit PMI has converged to the (weak) ISM, and both suggest there's no upside for industry in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/6921d2a8-c6cc-4f91-a27d-c94ad7fb911f.png" style="height: auto;"/></div>
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<div>A simple linear regression with the ISM makes this point clear.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/4e356511-c708-431f-bb5d-02f34bd9ecf7.png" style="height: auto;"/></div>
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<div>The <span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Conference Board leading indicators are also catching down with weak industrial activity.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/ac68ed97-0749-4657-90c7-ef235819de6d.png" style="height: auto;"/></div>
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<div>The diffusion index of industrial production tends to lead actual production by a few months, but it weakened in the last few of months.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/46a1c808-f7bc-4279-b032-c716c65e866b.png" style="height: auto;"/></div>
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<div>Weakness in the oil sector and USD strengthening continue to weight on industrial activity. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/feaee43e-b1d5-4e31-b745-cfee5ca7ef56.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/b1c1ca82-382a-4690-89cb-7748f1a1e5d3/e21a41c2-bbed-4e91-a4a7-b48a4ce48a1b.png" style="height: auto;"/></div>
US Univ. of Michigan Sentiment: Consumers Unabatedhttps://pgrahl.postach.io/post/us-univ-of-michigan-sentiment-consumers-unabated2016-03-03T13:29:20.991000Z2016-01-15T18:47:13ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in January at 93.3, up 0.7 points from December.</span></li><li>Sentiment rebounded sharply from Sep/15 low.</li><li>The recovery in Oct/Dec was led by poor households ("felling better about current situation"), contrasting with concerns among rich households ("worried about the future").</li><li>January was the first month in which the increase in Sentiment was led by the rich ("all the gain was recorded among households with income above $75k")...</li><li>...despite they being aware of the stock price declines and weak global economy.</li><li>Current level of Sentiment is associated with real consumption growing at 3.4%.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Historical episodes show that real consumption grows in the 2.5%-4.5% range while Sentiment is near current levels.</span></li><li>5-year inflation expectation <i>ticked up</i> to 2.7%.</li></ul><div><hr/></div>
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<div><u><i>Additional highlights in the report:</i></u></div><ul><li>"Consumer confidence inched upward for the fourth consecutive month due to more positive expectations for future economic growth"</li><li>"All of the early January gain was recorded among households with incomes above $75k"</li><li>"Stock price declines and a weakened global economy were spontaneously mentioned by nearly one-third of all households with incomes in the top third, identical to the levels following the August plunge in stock prices"</li><li>"Nonetheless, households held more favorable prospects for the national economy than in the closing months of 2015"</li><li>"Buying conditions for household durables were rated favorably by 81% of all consumers for the past two months, the highest level since January 2006"</li></ul><div><br/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in December at 93.3, up 0.7 points from the December estimate.</span><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"> </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/00f6e6bf-a4cd-402d-8a25-fd34b10c96e0/d4057676-39dc-4a57-a881-988629fc492a.png" style="height: auto;"/><br/></span></div>
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<div><u><i><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking closer at the relationship between Michigan Sentiment and household consumption:</span></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 3.4%.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.5%-4.5% range, with a few outliers above this range and no episode of real consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/00f6e6bf-a4cd-402d-8a25-fd34b10c96e0/ae1add10-11f1-43da-a5cf-7a1ff05bbbff.png" style="height: auto;"/><br/></span></div>
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<div>Inflation expectations ticked up to 2.7%.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/00f6e6bf-a4cd-402d-8a25-fd34b10c96e0/f8471ff2-e373-466e-acf6-3209e6e37910.png" style="height: auto;"/></div>
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US: December was a really bad month for retail; but trend is unchangedhttps://pgrahl.postach.io/post/us-december-was-a-really-bad-month-for-retail-but-trend-is-unchanged2016-03-03T13:29:22.090000Z2016-01-15T16:45:43ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li>December was a really bad month! But followed a strong November...</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The numbers:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">advance retail sales dropped 0.1%mom, in line with market consensus; gave back part of the 0.4%mom gain in November;</span></li><li>excluding gasoline stations, sales were flat in the month (vs. +0.5%mom in November);</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">control group dropped 0.3%mom <i>well below</i> +0.3% consensus; gave back part of the 0.5%mom gain in November.</span></li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">However, despite monthly disappointment, trend growth remains unchanged:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of total retail sales ex gasoline stations increased from 4.4% to 4.6%.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of the 'control group' slowed from 3.4% to 3.3%. </span></li><li>Both trends are very close to the 4-year growth pace: consumers remain resilient!</li><li>Recall that retail prices have trended slightly down -- so the above growth rates understate volume growth!</li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Despite all the headlines of an inventory problem in the retail sector, inventory-to-sales ratio remained roughly flat (excluding gasoline).</span></li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The overall trend for retail sales excluding gasoline at gas stations <i>increased</i> slightly to 4.6% in the last 12 months (from 4.4%). This trend is broadly unchanged compared to the longer (4 year) trend of 4.5% nominal growth. </span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/277789db-5233-4ad7-8159-f0db9ef985b9.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/a5dd94bd-5226-4251-b2fa-aa523a040ac3.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below compares total retail sales with retail excluding gasoline sales. It is clear that most of the slowdown in retail sales since mid-2015 was due to falling gasoline prices.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/e68d31bc-0703-419f-9b5e-17b24a6b128a.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking at the "control group" (total retail excluding auto dealers, bldg materials, gas stations) a similar growth picture emerges: 3.3% growth in the last year and 3.0% in the last 4 years.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/a1e26530-0018-43d8-b2d7-9ac8679bd57a.png" style="height: auto;"/></div>
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<div>Excluding residual gasoline sales that are inside the control group (fuel dealers) shows a better picture, with adjusted-control sales growing one percentage point faster than the number reported. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/29db9db0-6303-4fc2-9850-22378c112ec0.png" style="height: auto;"/></div>
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<div>Also, it is important to recall that (control group) retail prices have been trending down in the last year...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/28a4034c-9a74-4f6e-8cc3-7577b464c285.png" style="height: auto;"/> </div>
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<div>...which results in a very healthy growth rate in retail <b><i>volumes. </i></b></div>
<div><i><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/57ddaffe-d2c5-446d-9535-f2e7d5b86e8b.png" style="height: auto;"/><br/></i></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><u style="font-weight: bold;">Inventories:</u> stable if one excludes gasoline sales (latest: November)</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/ebbc8f0a-5e11-4bc9-b854-33a7f6ed9f5d.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/372274e9-1937-4575-9965-884a1d0d5de1.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Extra charts</b></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below show retail and food services by kind of business. The red line is an index in log (averages zero in the period) so that a number 10 in the scale means sales are 10% higher than the period average. The red dashed line is the trend in the last 12 months and the blue bars (right scale) are the monthly percentage change. The headline is how the slope of the red dashed line has changed compared to last two months.</span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.7% to 6.4% to 7.2%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/ea4f4dde-9969-406a-93ec-e42b628e7413.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.5% to 5.8% to 6.5%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/3e031046-cc85-40c4-97f1-6c1f4a9b74f0.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from -3.8% to -1.8% to -2.6%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/391ed366-a61f-4090-8152-93efca97e0a7.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.4% to 3.0% to 3.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/adf70e2b-a527-4436-9893-ebd718dcca54.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 1.9% to 1.8% to 1.5%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/d9438ce5-42b8-492f-bb0d-2b42864a5856.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 4.0% to 3.8% to 4.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/74211e7c-53be-44dc-9090-d7f4bf7b9d6a.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from -14.2% to -11.6% to -8.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/a486b0a8-7d60-4325-970e-aae153dd418b.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 2.6% to 1.8% to 1.7%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/a5550427-ee0f-4a75-b7f4-0c15f8774b89.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.0% to 7.0% to 8.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/4f30c00e-66d1-443d-b5e7-181701b3a191.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 2.0% to 2.9% to 2.1%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/758f6362-ad3b-4518-a205-1698e128d1d3.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.9% to 2.9% to 2.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/525cafcc-a9bf-4bce-b8a4-d8cf959e7e75.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.7% to 7.2% to 7.2%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/2f263e59-d80c-4289-ae6b-17b919b82288.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 5.6% to 5.9% to 6.4%</u></i></b></span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0487e156-62c8-44a3-8a87-9d743a3e389d/93e9ced4-3b80-4f38-af5b-dd219ebc10d1.png" style="height: auto;"/></div>
US December employment by categoryhttps://pgrahl.postach.io/link/us-december-employment-by-category2016-01-12T16:38:06.382000Z2016-01-11T16:03:06ZPaulo Gustavo Grahl, CFA<div style="box-sizing:border-box;"><h1 style="box-sizing:border-box;font-size:36px;margin:0.67em 0px;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;">December employment by category</h1><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">The charts below show employment by category. The blue line is total employment in the category, the orange bar is monthly change and the red line is the linear regression in the last two years.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><strong style="box-sizing:border-box;font-weight:bold;">Total payroll increased 292k in December</strong>, after a 252k growth in November (which was revised up from 211k). The trend for the last 6 months slowed from 280k/month by the end of last year to 229k in the 6 months to December.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><strong style="box-sizing:border-box;font-weight:bold;">Private payroll increased 275k in December</strong>, after 240k growth in November (revised up from 197k). The trend for the last 6 months slowed from 270k/month by the end of last year to 219k in the 6 months to December.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Most of the slowdown in the pace of job creation was concentrated in the goods producing sector (mining and manufacturing); construction jobs are doing ok and the the services sector has, so far, not being affected by manufacturing slowdown. Overall, the 6-month pace of job creation in the goods sector slowed from 50k (at the end of last year) to close to 17k, while in the services sector it slowed from 220k to 202k in the same comparison.</span></span></span></p><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Employment categories</h2><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:10px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Total nonfarm</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Total private</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Goods-producing</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Mining and logging</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Construction</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Manufacturing</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Private service-providing</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Trade, transportation, and utilities</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Wholesale trade</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Retail trade</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Transportation and warehousing</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Utilities</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Information</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Financial activities</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Professional and business services</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Temporary help services</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Education and health services</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Educational services</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Health care and social assistance</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Leisure and hospitality</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Other services</span></span></span></li></ul></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Government</span></span></span></li></ul></li></ul></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Charts</h2><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Total nonfarm (trend from 242.1 to 241.7 to 243.3/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/38daee3d-b38b-41f8-ad8c-10e9219d6f83.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Total private (trend from 235.0 to 234.5 to 235.5/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/dc1a9890-b69f-4160-ba5b-358ff20e1151.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Goods-producing (trend from 32.4 to 30.4 to 28.9/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/ba97970b-0a47-483c-9138-a3e766d3c35d.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Mining and logging (trend from -1.5 to -2.0 to -2.3/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/794bb592-e89e-46dc-a73e-562e9b7e52d8.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Construction (trend from 21.8 to 21.7 to 21.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/7ca76dd6-9935-4f99-af52-1ab5b381ef5c.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Manufacturing (trend from 13.0 to 12.0 to 11.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/bb074992-a2af-4a96-abe7-f64ad300bf27.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Private service-providing (trend from 202.6 to 204.1 to 206.7/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/50dc458d-8b31-43be-936c-604fa8fc23b1.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Wholesale trade (trend from 7.8 to 7.5 to 7.3/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/4f3736df-03a6-4e97-8deb-a3757e5d4ecf.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Retail trade (trend from 23.9 to 24.2 to 23.9/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/aad8415a-ac43-4078-ac9f-6566702e25b8.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Transportation and warehousing (trend from 12.1 to 11.4 to 11.5/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/8f9c82c2-6de3-428a-82cb-ae1b39c930b0.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Utilities (trend from 0.7 to 0.8 to 0.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/7fd96eb6-fed2-40f9-ba3c-4ad504d62a60.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Information (trend from 3.8 to 3.9 to 4.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/ab505395-60ba-421e-a9c6-300cb9e3933c.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Financial activities (trend from 11.8 to 12.2 to 12.4/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/8e5e27df-1147-4688-8b9b-4e5f4cedf681.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Professional and business services (trend from 54.2 to 54.4 to 54.9/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/eba03cc0-31de-45ba-875d-a136ba2663e3.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Temporary help services (trend from 11.7 to 11.2 to 11.1/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/8001c6d9-189f-4368-8f93-bafd3e40c1cd.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Educational services (trend from 4.1 to 4.4 to 4.6/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/ad494883-f9d4-4dc4-a681-b2df1854a095.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Health care and social assistance (trend from 40.9 to 42.3 to 43.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/3c26ebe1-8ae2-49bf-9430-a0265e73a51a.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Leisure and hospitality (trend from 37.1 to 37.3 to 37.5/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/f8fce0c5-338e-42eb-ac60-0c740ba9ceb7.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Other services (trend from 6.1 to 5.8 to 5.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/9e104992-9ee4-4ddb-8f67-2c85062ae343.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Government (trend from 7.1 to 7.2 to 7.7/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/18d40221-bbe6-49d7-90d8-cd2a8f4499a7/2e3e4c8b-d608-41cf-87c9-ad03ab84af9d.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p><hr style="box-sizing:content-box;height:0px;margin-top:20px;margin-bottom:20px;border-width:1px 0px 0px;border-top-style:solid;border-top-color:rgb(238, 238, 238);"/><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Dr. Paulo Gustavo Grahl, CFA (2016-01-11)</span></span></span></p></div></div></div><br/>US FOMC Minutes digest: concerned about inflation; risk management was behind decision to raise rateshttps://pgrahl.postach.io/post/us-fomc-minutes-digest-concerned-about-inflation-risk-management-was-behind-decision-to-raise-rates2016-01-06T21:37:23.420000Z2016-01-06T20:28:48ZPaulo Gustavo Grahl, CFA<div><i>Main takeaways:</i></div><ul><li>Minutes confirmed risk management was key to the decision to increase rates (see <a href="http://www.evernote.com/l/AJE0VVtqllxH7bTRHrOVhBmd7GRVZx8ChL8/">US FOMC digest: risk management</a>):</li><li style="list-style: none; display: inline"><ul><li>monetary policy has lags;</li><li>for FOMC members, an 'early' and gradual hike, therefore, reduces the risk "it might need to tighten policy abruptly" later on;</li><li>the asymmetric risks posed by rates still close to zero was dealt with by promising to keep a large balance sheet "until normalization" of interest rates is "well under way."</li></ul></li><li>FOMC minutes stressed a couple of times the dichotomy between domestic and foreign developments:</li><li style="list-style: none; display: inline"><ul><li>participants took the view that domestic demand would only be partially offset by weakness in net exports, and</li><li>acknowledged downside risks from global and financial developments had receded.</li></ul></li><li>Inflation outlook was debated at length by FOMC:</li><li style="list-style: none; display: inline"><ul><li>members noted the decline in oil prices "was likely to exert some additional <i><u>transitory</u></i> downward pressure on inflation in the near term.</li><li>members also noted that "some survey-based measures" of inflation expectations moved down, and <u><i>several</i></u> members expressed unease with that.</li><li>for <u><i>some members,</i></u> risks to their inflation forecasts remained considerable (further shocks to oil and commodities; a sustained rise in US dollar).</li><li>a <u><i>couple</i></u> worried global disinflationary forces could be more important than improving labor market for the inflation outlook.</li><li><u><i>some members</i></u> said the decision to raise rates was <u>a close call</u>, given uncertainty about inflation dynamics.</li></ul></li><li>Above mentioned concern with inflation was reflected in the statement saying that the Committee "would carefully monitor <i>actual and expected</i> progress toward its inflation goal."</li><li>However, the hurdle for inflation is not very tough -- underlying PCE momentum is running in the 1.2%-1.5% range, and the Fed central tendency forecasts for 2016 is 1.2%-1.7%.</li></ul>US External Trade likely to be a drag on growth again in Q4https://pgrahl.postach.io/post/us-external-trade-likely-to-be-a-drag-on-growth-again-in-q42016-03-03T13:23:59.285000Z2016-01-06T14:03:30ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Net exports likely to be a drag on growth again (~0.4pp).</li><li>Real imports dropped in the last three months, but the trend in the last 12-months is still a healthy 4.6% growth pace.</li><li>Weak US exports hit by strong dollar and sluggish global trade. </li></ul><div><br/></div><hr/><div>Real non-petroleum exports are down 2% in Oct/Nov vs Q3 and imports are down 0.6% in the same comparison. Excluding petroleum, exports volume contracted by 1.6% and imports by 0.4%.</div>
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<div>Trade results for October/November, if repeated in December, would lead to another negative contribution of external trade to growth of around 0.4pp. But negative contribution from external trade to growth, per se, does not imply overall GDP growth will be weak (see for instance the negative contributions from net exports to growth in the 1997-2005 period)</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/d6468b9f-5b80-4050-b1ae-96113f0909f5.png" style="height: auto;"/></div>
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<div>The charts below show the volumes of non-petroleum exports and imports. Exports volume is flat while imports volume is growing at around 5%.</div>
<div><br/></div><table style="border-collapse: collapse; margin-left: 0px; table-layout: fixed;width:76.5432098765432%;"><tr><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:15.268817204301074%;"><div><b>Last 20 years</b> (trend shows last 2 years)</div></td><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:84.6236559139785%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/84a68ad4-798b-455b-a915-be7e89d0f259.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><b>Last 3 years</b> (trend shows last 12 months)</div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/c58714e9-b9ab-43ad-9c95-a28dfec91e8f.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><b>YoY growth</b></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/b8d83243-ca82-4a7a-a1a4-3c40570a07e0.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
<div>The jump in import growth precedes the stronger USD and coincides with an upturns in job creation and consumption that happened in 2014 -- therefore not likely to be a strong consequence of the currency strength and import substitution (although it may play some role). </div>
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<div>The slowdown in exports, however, happened at the turn of the year, and therefore could potentially be a quick response to the strenghtening of the dollar that started in mid-2014. </div>
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<div>However, the chart below shows that US exports are moving roughly in tandem with world exports. US exports relative to world exports dropped since the start of 2015, but the size of the adjustment does not suggest that the dollar strengthening is playing a major role for weak US exports.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/845e9b66-6344-4074-a4a9-ff21bb29ea2c.png" style="height: auto;"/></div>
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<div>Of course it could be just a matter of time for US exports to shrink relative to world exports, but the recent weak performance seems more likely a result of sluggish world trade rather than dollar strength.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/e9e8d477-6a81-4896-bd11-f205cf42644b.png" style="height: auto;"/></div>
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<div>Meanwhile, the ISM export orders improved a bit but still do not suggest upside in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f1267c98-9162-4b37-b172-9c2c8bf99e42/069ce3c2-4d85-4a79-9eb6-680107cf2358.png" style="height: auto;"/></div>
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US 3Q15 GDP (third release): looking for signs of a turning pointhttps://pgrahl.postach.io/post/us-3q15-gdp-third-release-looking-for-signs-of-a-turning-point2015-12-22T19:51:27.219000Z2015-12-22T17:34:41ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><u>Main takeaways:</u></b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The third release of 3Q GDP didn't change the overall picture.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Given the weakness in some recent economic and financial indicators it is important to track credit and discretionary spending for signs of a turning point.</span></li><li>The current 2% pace of GDP growth is still likely enough to reduce labor market slack.</li><li>Domestic demand is growing at a healthy 3%; household consumption also growing at 3%.</li><li>Investment (ex. oil) is growing at 6% pace.</li><li>Government consumption and investment bottomed in 2014 (after being a drag in the 2011-2013) and will likely continue to add to growth next year.</li></ul><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
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<div><b>GDP revised down a tenth to 2.0%; real GDI revised down four tenths to 2.7%.</b></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Third quarter GDP was revised down by 0.1pp, a bit better than market consensus. The small downward revision to the percent change in real GDP primarily reflected a downward revision to private inventory investment.</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/38afd7be-a9d4-4132-be89-5f94e88537bb.png" style="height: auto;"/></div>
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<div><b>GDP: heading towards recession?</b></div>
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<div>Given the weakness in some recent economic and financial indicators, it is interesting to look at some charts that historically have shown turning points in the economy.</div>
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<div>The flow of credit to the economy (as a share of GDP) often -- but not always -- peaks ahead of or coincidently with recessions. The chart below shows that, overall, credit flows are at a relatively modest pace for both corporates and households (compared to the history since 1970). Nevertheless, the pace of credit creation has slowed for households since 1Q and nonfinancial corporates since 2Q. Bank lending data at a higher frequency (weekly) does not suggest a material slowdown in credit, but this bears watching given the sharp widening of HY spreads.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/2eebb4b3-6deb-472c-829f-80b31c430c8b.png" style="height: auto;"/></div>
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<div>Another point worth looking is the strength in discretionary spending. One way to look at it is to calculate the ratio of growth in spending on consumer durables and private investment to final sales growth (the "Duncan" indicator). The chart below shows that this indicator usually turns down before the recession (shaded areas in the chart). The first chart considers total private investment and the second excludes investment in the energy sector. So far discretionary spending is not signaling an impending recession.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/8702ad01-39ae-4b9a-bd36-0a233d35375a.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/5df22136-d11f-4e18-9bcb-ca641d48786d.png" style="height: auto;"/></div>
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<div>Another way to look at discretionary spending is to look at the share of the income spent on those items. The chart below highlights that consumption of durable goods and investment is still at low level as a share of income. Even excluding residential investment, it seems that the share of discretionary spending in total income is low. Excluding housing and energy, one can see that the share of discretionary consumption/investment is still increasing.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/9a2b9ad6-3289-47b8-ba8b-300973fef307.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP Chart pack</b></span></div><hr/><div><b>GDP is running above potential...</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/2bc583db-97da-4cff-8d10-62c09f9b0c5a.png" style="height: auto;"/></div><hr/><div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">GDP increased 2.1% yoy in 3Q; trend in the last 2 years is 2.5%</span></b></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/2e1ba898-2334-4dd1-a9f7-cbde5d7767cc.png" style="height: auto;"/></div>
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<div><b>GDP and real GDI (gross domestic income) are both growing at around 2% yoy. </b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/6d6948d9-b228-4536-a525-29917d74e13f.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/ec0fce47-941a-43fc-bb05-21412588fbe4.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
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<div><b>GDP excluding inventories is growing at 2.5% in the last 2 years and 2.1%yoy</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/eedfa0ce-778c-411c-9a30-605e8944738f.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The value of goods and services purchased by US residents (regardless of where goods and services were produced) excluding inventories is growing at a healthy 2.9% since mid-2014.</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/b385bcd2-bcf8-48cc-839f-0027afd3c1b0.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Business value added slowed to 1.8% in Q3, but overall 2.6% growth trend is unchanged</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/cc0b5887-6866-4b35-9ed5-d0f2e9f1f226.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: Consumption</b></span></div>
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<div><b>Consumption is growing at 3% (constant prices)</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/8dea2c66-cc65-4faf-aa6b-aa0466c7758f.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/fe4463c1-0c09-4e79-a2bd-6a7d507f68f1.png" style="height: auto;"/></div>
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<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Core consumption (excluding energy and food) is even a bit higher.</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/bcf02a40-8b51-4cd8-92a9-e78cec19551f.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><hr/><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: Investment</b></span><hr/></div>
<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The annual pace of investment growth is slowing...</span></b></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/44bd85b8-62ce-4567-942e-1563e19b870f.png" style="height: auto;"/><br/></span></div>
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<div><hr/><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">...but recall that there is a collapse in investment in the oil sector.</span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/329ab4fd-2054-4f85-b476-2c999114f45e.png" style="height: auto;"/> </div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><hr/></div>
<div><b><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Excluding oil sector, overall investment picture is improving, with annual growth rates at 6%. Note that this is not far away from the pace of investment growth before the great recession. </span></b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/30f4585a-1f29-4aef-8ca6-c6fdc3892ea0.png" style="height: auto;"/></div>
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<div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>GDP breakdown: External trade</b></span></div>
<div><hr/></div>
<div><b>Exports slowed materially, likely due to global growth slowdown and dollar strengthening...</b></div>
<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/9a8cda34-c390-423b-b977-80b124dee4ae.png" style="height: auto;"/><br/></b></div>
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<div><hr/></div>
<div><b>...while imports are growing at a healthy 5% pace.</b></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/1b8e7d09-3f2a-4e08-9bbf-c98c88dc0d76.png" style="height: auto;"/></div>
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<div><hr/></div>
<div><b>GDP breakdown: government</b></div>
<div><hr/></div>
<div><b>Government consumption and investment bottomed in 2014 and will likely continue to add to growth next year.</b></div>
<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9c813728-929e-462b-b25c-ca65a06bff8b/aeca7c87-9a29-4c83-abef-e16d0b97eae8.png" style="height: auto;"/><br/></b></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
Philadelphia Fed Business Outlook: weak + interesting special questionhttps://pgrahl.postach.io/post/philadelphia-fed-business-outlook-weak-interesting-special-question2015-12-17T14:19:23.409000Z2015-12-17T13:41:42ZPaulo Gustavo Grahl, CFA<div>Weak headline Philly Fed, below expectations of a roughly flat 1.0 reading.</div>
<div>The "modified" Philly Fed (using weights / components similar to ISM) shows a small up-tick, but it also depicts a very weak manufacturing.</div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>Philly Fed Diffusion Index</b></u></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>Philly Fed Modified (according to ISM weights)</b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c5771089-b500-4e6f-9f50-c48486932c1f/f427eda3-e5aa-420f-bca4-58246d42c0ef.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c5771089-b500-4e6f-9f50-c48486932c1f/85b6ec4f-7517-4b44-8251-c65ac4843ebd.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
<div>The special question focused on business costs. As expected, input costs other than labor costs are not a reason for concern. However, a significant share of business expect wage and health costs to increase. This is negative for profits.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c5771089-b500-4e6f-9f50-c48486932c1f/c11d5621-3f51-4c18-9085-addaf08fb2c4.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c5771089-b500-4e6f-9f50-c48486932c1f/3c98570b-a16f-4789-bf79-f3124bb5e9d2.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c5771089-b500-4e6f-9f50-c48486932c1f/83c3d3f0-8d30-4692-a6c9-72da799889ab.png" style="height: auto;"/></div>
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US FOMC digest: risk managementhttps://pgrahl.postach.io/post/us-fomc-digest-risk-management2016-01-06T21:01:51.608000Z2015-12-17T12:48:46ZPaulo Gustavo Grahl, CFA<div><i>Main takeaways:</i></div><ul><li>Dovish hike delivered; the <i>gradual </i>base case is 100bp/year, but market is not convinced; Fed emphasizes policy remains accommodative.</li><li>Key reason for moving (when inflation is still low): monetary policy has lags; a delay increases risk of abruptly tightening later.</li><li>Reference to <i>actual</i> inflation and that inflation expectations have to be <i>well anchored</i> probably helped to bring the doves on board.</li><li>However, the hurdle for inflation is not very demanding -- underlying PCE momentum is running in the 1.2%-1.5% range and the Fed central tendency forecasts for 2016 is 1.2%-1.7%.</li><li>Fed expects <i>neutral fed funds (r*)</i> to raise only gradually; markets, on the other hand, are betting on a <i>secular stagnation</i> type of story -- r* remains zero for the next two years and monetary policy stance remains even more accommodative than today.</li></ul><div><hr/></div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;margin-left:0px;table-layout:fixed;width:100%;"><tr><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:15.802469135802468%;"><div><span style="font-size: 13px;"><u><b>FOMC </b></u></span></div></td><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:84.11522633744856%;"><div><span style="font-size: 13px;"><b><u>Comments</u></b></span></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">Policy decision</span></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><font size="2">Raise the target range for the federal funds rate to 1/4 to 1/2 percent. Monetary policy remains accommodative.</font></div>
<div><span style="font-size: 13px;">Reinvestment policy will continue until "normalization of the level of the federal funds rate is well under way" -- this should "reduce the risk that fed funds rate might return to the effective lower bound in the event of future adverse shocks".</span></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">Why?</span></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">"Considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans", and reflects "confidence that the economy will continue to strengthen". The recovery, however "is not yet complete": there's room for labor market to improve further and inflation continues to run below 2%. So why increase rates?</span></div>
<div><span style="font-size: 13px;">a) softness in inflation is due to transitory factors that should abate over time;</span></div>
<div><span style="font-size: 13px;">b) diminishing slack should put upward pressure on inflation as well;</span></div>
<div><span style="font-size: 13px;">c) it takes time for monetary policy actions to affect future economic outcomes;</span></div>
<div><span style="font-size: 13px;">d) a delay of normalization (for too long) increases risk of abruptly tightening policy at some point to avoid overshooting the goals.</span></div>
<div><span style="font-size: 13px;"><br/></span></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">Risks</span></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">Risks are balanced.</span></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">Policy outlook</span></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><span style="font-size: 13px;">In "determining the <u>timing and size</u> of future <u>adjustments</u>", FOMC "will carefully monitor <u>actual</u> and expected progress toward our inflation goal". Also, </span><font size="2">FOMC confidence in the inflation outlook rests importantly on its judgment that longer-run inflation expectations remain</font> <u style="font-size: 13px;">well anchored</u><font size="2">.</font></div>
<div><span style="font-size: 13px;">Normalization process likely to proceed gradually. This is consistent with the view that neutral nominal fed funds rate (r*) is currently low by historical standards.</span></div>
<div><span style="font-size: 13px;">FOMC expects that with "gradual adjustments in the stance of monetary policy" economic activity will continue to expand at a moderate pace and labor market indicators will continue to strenghten -- by how much? look at forecasts.</span></div></td></tr></table><div><br/></div>
<div><u><b>Discussion on equilibrium / neutral fed funds rate (r*)</b></u></div>
<div>The FOMC expects federal funds rate to remain, for some time, below levels that are consistent with its longer run assessment. The key rational behind this idea is that for that is the neutral rate (r*) is currently low and will only move gradually towards its long term level.</div>
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<div><u>Why is r* low? </u></div>
<div>Because of the headwinds: tighter underwriting standards, limited access to credit, deleveraging, contractionary fiscal policy, weak growth abroad, significant appreciation of the dollar, slower productivity and labor force growth, elevated uncertainty about economic outlook.</div>
<div>These have declined noticeably over the past few years, but some have remained significant. As these abate, r* should gradually move higher over time -- this can be seen in the SEP.</div>
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<div><u>How do you know for sure that r* is low?</u></div>
<div>One indication is that growth has been only moderate despite very low level of funds rate and the large balance sheet. Had r* been higher, economic expansion would have been much more rapid.</div>
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<div><u>How low?</u></div>
<div>During the October FOMC meeting the staff briefed participants about the topic and the conclusion leaned towards:</div><ul><li>r* was negative in the aftermath of the 2008-09 financial crisis and is <u>currently close to zero</u>.</li><li>Equilibrium level of r* would likely remain low relative to estimates before the financial crisis (due to productivity and demographic factors). This is reflected in SEP's forecast of 1.5% real rate in the long run (below the 2% used in the past).</li></ul><div><br/></div>
<div>According to the Taylor rule mentioned by Yellen (<a href="http://www.evernote.com/l/AJFpJmoZk_JNlb8dBLhWOhJja4W1ssnG7uc/">Yellen's preferred Taylor rule</a>) on her remarks earlier this year (<a href="https://www.evernote.com/shard/s145/sh/07925130-300f-4892-bd88-e155b4b9aac9/602c3c5384485c98">Normalizing Monetary Policy</a>), even considering r*=0 (the <b><span style="color: rgb(65, 173, 28);">green line</span></b> in the chart below) the Fed would already be behind the schedule. An r*=0 (and current readings on PCE inflation and unemployment rate) would imply fed funds approximately <i>50bp</i> <i>higher</i> -- this is why the Fed calls the monetary policy stance <i>accommodative</i> (below the neutral).</div>
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<div>The fact that the slope of the 'dots' curve is higher than the <span style="color: rgb(65, 173, 28);"><b>green line</b></span> reflects the idea of r* gradually moving higher over time. Market forecasts, on the other hand, are betting on a <i>secular stagnation</i> type of story -- r* remains zero for the next two years and monetary policy stance remains a bit more accommodative as it is today (a bit more than 50bp below the r*=0 line).</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/f2ff1d7c-da43-4ce2-88a6-3e01337a7be0.png" style="height: auto;"/></div>
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<div><u><b>Emphasis on <i>actual</i> inflation</b></u></div>
<div>The newly introduced <i>actual</i> in the sentence "the Committee will carefully monitor <u>actual</u> and expected progress toward our inflation goal" was probably key to bring the doves on board (the other was the reference to the reinvestment policy, which would continue until "normalization of the level of the federal funds rate is well under way" -- this probably helped to please Brainard).</div>
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<div>However, the Committee was smart enough to leave this comment flexible enough to avoid tyeing the Fed to a given path of inflation. Chair Yellen ably avoided giving any hard target when questioned by reporters. They avoided the historical mistake of the 6.5% unemployment target... </div>
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<div style="margin-left:40px;"><span style="font-size: 13px;">"Now, I've tried to explain in many of my -- and many of my colleagues have as well why we have reasonable confidence that inflation will move up over time, and the committee declared it had reasonable confidence. Nevertheless, that is a forecast. We really need to monitor over time actual inflation performance to make sure that it is conforming, it is evolving, in the manner that we expect. </span><span style="font-size: 13px;">So it doesn't mean that we need to see inflation reach 2 percent before moving again, but we have expectations for how inflation will behave, and were we to find that the underlying theory is not bearing out, that it is not behaving in the manner that we expect, and that it doesn't look like the shortfall is transitory and disappearing with tighter labor markets, that would certainly give us pause. And we have indicated that we are reasonably close, not quite there, but reasonably close to achieving our maximum employment objective. </span><span style="font-size: 13px;">But we have a significant shortfall on inflation. So we are calling attention to the importance of verifying that things evolve in line with our forecasts."</span></div>
<div style="margin-left:40px;"><span style="font-size: 13px;"><br/></span></div>
<div style="margin-left:40px;"><span style="font-size: 13px;">"I'm not going to give you a simple formula for what we need to see on the inflation front, in order to raise rates again. We will also be looking at the path of employment as well as the path for inflation. </span><span style="font-size: 13px;">But if incoming data were, led us to call into question the inflation forecast that we have set out, and that could be a variety of different kinds of evidence, that would certainly give the committee pause. But I don't want to say there is a simple benchmark. </span><span style="font-size: 13px;">The committee expects inflation over the next year at the median expectation is for inflation to be running about 1.6 percent. And both core and headline, so we do expects it to be moving up, but we don't expect it to reach 2 percent."</span></div>
<div style="margin-left:40px;"><br/></div>
<div>The chart below gives a good picture of recent inflation performance. Both headline and core inflation were increasing at the same pace (about 1.5%) from late 2011 to mid 2014, when oil prices were roughly flat. From October 2014 to January headline inflation dropped 0.8% (-3.4% annualized) reflecting the drop in energy prices, and has increased 1.1% until last October (about 1.4% annualized). This late rebound is headline prices is roughly in tandem with the pace of core inflation. </div>
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<div>Core CPI inflation momentum is already running 2.4% (<a href="http://www.evernote.com/l/AJHcry4QywxOOK2D8lqDFhbB_zWxU9rOgSE/">details here</a>) but the gap with PCE inflation has opened and core PCE momentum is in the 1.2%-1.5% range. The Fed expects PCE inflation in the 1.2% to 1.7% range in 2016 (central tendency) so the bar is <u>not</u> very high. </div>
<div>However, further decline in oil prices and/or strengthening of the dollar could easily delay Fed action. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/da98e4c9-3448-471c-9e89-3df10d27d45d.png" style="height: auto;"/></div>
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<div><u><b>FOMC reference scenario</b></u></div>
<div>The table below is a reference to the FOMC <i>base case,</i> which is compatible with "gradual adjustments in the stance of monetary policy" -- i.e., 100bp/year.</div>
<div>The evolution of the actual economic variables and the evolution of Fed's forecasts will tell whether the economy is ahead or behind the base case.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/28cd6612-ac90-4fd0-8d28-2c6f9ca58662.png" style="height: auto;"/></div>
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<div><b>Chart 1) Evolution of Fed forecasts for unemployment and inflation</b></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>Unemployment rate</b></u></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>PCE inflation</b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/6bf67780-853b-4fa1-a85b-e13eae08b9bd.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/bd0fed98-b49b-42a5-a9c0-e3a525c7eca8.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/f3011a96-a20f-4c19-879f-5130190f0db7.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/e440419f-b352-4dea-8cf5-03ffaabe6103.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/1edf6ace-0b89-41bf-95c6-f4b1d8434439.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/a3eb35c4-daf9-470f-9962-e2000a58248a.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/c1229b85-2039-482b-a01c-073ea8ab71c6.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><br/></div></td></tr></table><div><br/></div>
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<div><b>Chart 2) Dots and the implied Taylor rule</b></div><table style="border-collapse: collapse; margin-left: 0px;table-layout:fixed;width:75.55555555555556%;"><tr><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:28.649237472766885%;"><div><br/></div></td><td style="border: 1px solid rgb(211, 211, 211); padding: 10px; margin: 0px;width:71.24183006535948%;"><div style="text-align: center"><u><b>Taylor rule </b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div>Fed funds in 2015 below the r*=0 Taylor rule -- meaning monetary policy stance is accommodative</div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/fa2d7019-1906-48d1-a5ad-6019b2da15e3.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div>Dots for 2016 still imply a accommodative policy stance -- even assuming r* remains at zero!</div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/c5ce2833-65f7-4b50-8847-5fe84c080b2b.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div>Dots for 2017 moved down, suggesting the Fed sees headwinds taking longer to abate. </div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/34555b6a-965c-47ed-b4d1-1eb39584199d/8468da47-cbc0-4251-b94e-b8692b05339b.png" style="height: auto;"/></div></td></tr></table><div><br/></div>
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US Industrial Production remained weak in November/2015https://pgrahl.postach.io/post/us-industrial-production-remained-weak-in-november-20152015-12-16T17:30:23.912000Z2015-12-16T16:12:21ZPaulo Gustavo Grahl, CFA<div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong>Main takeaways:</strong></span></div><ul><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Industrial production fell 0.6% in November, again largely due to energy.</span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Non-energy IP was close to flat in the month. Co</span><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">re manufacturing rose 0.1%. </span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">ISM / Markit surveys and Conference Board leading indicator do not suggest upside for industry in the near term.</span></li><li>Weakness in oil sector and strong dollar remain a concern.</li></ul><div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong><br/></strong></span></div><hr/><div>Industrial production fell 0.6% mom in November, again largely due to energy. Non-energy industrial production was flat in November.</div>
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<div>The table below compares total IP, Manufacturing production, Core manufacturing and IP excluding energy. All have been weak in recent months, but the energy sector has had a material negative impact on total industrial activity. Excluding energy, one can see a slowdown in production since late 2014 -- but the overall picture still seems aligned with the trend growth observed since 2010.</div>
<div><br/></div><table style="-evernote-table:true;border-collapse:collapse;table-layout:fixed;margin-left:0px;width:100%;"><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>Production level and growth rates</b></u></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div style="text-align: center"><u><b>Capacity utilization</b></u></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/ee1a3209-0400-450a-9d17-699bfdbba509.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:49.958847736625515%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/2a2cf013-2dc7-4dc8-a4f7-fea663845f28.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/55174d14-9fe1-4b1c-8d29-6675a3aae710.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/691ca6aa-4df0-444d-989e-67c71921dc69.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/62331f62-88a7-4e8e-bba2-0f4e76ff6b62.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/2868a43f-745b-4cb7-84b8-301a01e6c3ed.png" style="height: auto;"/></div></td></tr><tr><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/be186c1d-8d58-4b14-8577-8879c892b9b3.png" style="height: auto;"/></div></td><td style="border-style:solid;border-width:1px;border-color:rgb(211,211,211);padding:10px;margin:0px;width:50%;"><div><br/></div></td></tr></table><div><br/></div><hr/><div>What about the upcoming months? Can we expect any improvement?</div>
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<div>The Markit PMI has converged to the (weak) ISM, and both suggest there's no upside for industry in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/20ac0fce-4df8-40ed-91a6-202521cce2dd.png" style="height: auto;"/></div>
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<div>A simple linear regression with the ISM makes this point clear.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/d2d14998-5e62-4956-85a2-03d1086aed45.png" style="height: auto;"/></div>
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<div>The <span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Conference Board leading indicators are also catching down with weak industrial activity.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/22770e66-6cb8-403c-81d4-910d40b45913.png" style="height: auto;"/></div>
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<div>The diffusion index of industrial production tends to lead actual production by a few months, but it weakened in the last few of months -- reducing the room for upside surprises in total production.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/48055683-6e7a-450a-a9fc-e624a1dafdda.png" style="height: auto;"/></div>
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<div>Weakness in the oil sector and USD strengthening continue to weight on industrial activity. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/06e7f26f-fb45-45f2-9395-03183117ee64.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2853e1b-1b77-44dc-831a-c8f258c9cb02/2f8542f9-afdc-497d-b1fb-af6fd0e1564d.png" style="height: auto;"/></div>
US financial conditions and commodity prices ahead of the historical FOMC tomorrowhttps://pgrahl.postach.io/post/us-financial-conditions-and-commodity-prices-ahead-of-the-historical-fomc-tomorrow2015-12-15T18:07:28.378000Z2015-12-15T15:46:27ZPaulo Gustavo Grahl, CFA<div><u><i>Main takeaways:</i></u></div><ul><li>Commodities (including oil) breaking new lows.</li><li>Strong USD.</li><li>Equities off the highs with increasing vol.</li><li>Baa - Aaa spreads widening. High yield mkt close to panic.</li><li>But overall financial conditions are off the highs observed earlier in the year.</li></ul><div><u><br/></u></div>
<div><u><i>Charts</i></u></div>
<div><hr/></div>
<div>US trade-weighted dollar is higher than earlier in the year, when Fed warned about its negative consequences to the economy.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/afd6877a-0483-448a-9bcd-9b244a54b81d.png" style="height: auto;"/></div>
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<div>Oil prices are also at the lows.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/751f8cf0-cdcd-4168-a418-df9e8e002eff.png" style="height: auto;"/></div>
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<div>Retail gasoline prices are close to the lows.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/6e9e644b-669d-439d-8007-b2d7dfb4a265.png" style="height: auto;"/></div>
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<div>Commodity prices also at the lows.</div>
<div style="margin-left:0mm; margin-right:0mm; text-indent:0mm; margin-top:0.00mm; margin-bottom:3.52mm;"><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/cb58c280-ed8e-4a80-9b9a-1225b3da915f.png" style="height: auto;"/></div></div><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/797f0749-e528-4c19-9863-692b757b5753.png" style="height: auto;"/></div>
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<div>US equities recovered part of its Aug/Sep losses, but face renewed uncertainty.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/e010003c-2a59-4c59-90db-a44b63e425b5.png" style="height: auto;"/></div>
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<div>Equity vol is high again.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/f8c11067-ac62-4e83-8c5f-a29870ebe676.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/62a5b6ff-1e11-4cd6-b866-6a378196d6ac.png" style="height: auto;"/></div>
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<div>US 10y Treasuries</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/ee217b78-23a4-462c-9331-be1d40c7a8af.png" style="height: auto;"/></div>
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<div>Baa spreads widened</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/ddd3c6ee-7929-4c7c-b238-add79bd03320.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/770bec3a-8182-47e9-b5bd-6e7fce6cf599.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/8edc6f99-d091-4edd-bace-97900784b60c.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/791829ba-5d5a-4752-a41d-2e7ba5e1a709.png" style="height: auto;"/></div>
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<div>Market-based inflation compensation sharply down, but this could just be oil prices</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/bb7d2daf-f91f-47b2-8bf6-6603ed49c74f.png" style="height: auto;"/></div>
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<div>Financial conditions, as measured by GS, are tighter than in the last few years.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/1c2ae7af-69af-47b2-baae-8c20db02a880.png" style="height: auto;"/></div>
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<div>...but broadening the definition to include oil prices show a more benign picture</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/b75f5487-ad10-44da-b913-a88e4a977cfd.png" style="height: auto;"/></div>
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<div>Financial conditions, as measured by the Chicago Fed, also show a tightening, but overall levels remain in the accommodative range</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/a342a412-75cc-4047-9b99-f5457f3177b9.png" style="height: auto;"/></div>
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<div>Adjusting for the business cycle, Chicago Fed index suggest that financial conditions moved to tight earlier in 2015 and are now back to easy.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/2140983e-f4d1-44f7-b306-b5810e1bceeb.png" style="height: auto;"/></div>
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<div>Below, some additional financial conditions and financial stress indices</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/7030e0d7-cc54-4d03-9cd9-6936e8889dff.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/9ab30c70-38f1-4011-82c9-c2c49e2bc193.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/f2bd9f74-3696-4b72-9562-b90739148778.png" style="height: auto;"/></div>
<div><br/></div>
<div>Longer history of financial conditions and the relevant episodes.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/458d2b8c-ce1b-42fb-bc9c-baa969fad46c.png" style="height: auto;"/></div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fa70923-ba06-4d90-8fb8-653bdee96856/71d21383-fd8f-4c49-b4c3-29483b963d87.png" style="height: auto;"/></div>
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US Inflation: enough to remain confident? (Nov/2015)https://pgrahl.postach.io/post/us-inflation-enough-to-remain-confident-nov-20152015-12-17T22:04:50.301000Z2015-12-15T13:33:03ZPaulo Gustavo Grahl, CFA<div><b>Main takeaway:</b></div><ul><li>Core CPI inflation momentum rose to 2.4% (annualized).</li><li>Core services inflation increased from 2.5% yoy in June to 2.9% yoy in November. Core goods are down 0.6% yoy.</li><li>Sticky-price CPI (a sign of anchored expectations) is trending up.</li><li>Interestingly, core inflation is unabated despite the strong dollar.</li><li>Headline inflation will likely move up in the next couple of months due to base effect.</li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Fed's criteria for raising rates:</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><blockquote style="margin: 0 0 0 40px; border: none; padding: 0px;"><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen <b>further improvement in the labor market</b> and is <b>reasonably confident that inflation will move back to its 2</b> percent objective over the medium term."</span></div></blockquote><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Given the expected hike tomorrow, the Fed <b>is</b> <b>reasonably confident</b> inflation will move back to 2%. </span></div>
<div>The focus, then, is likely to move toward the criteria the Fed will use to justify the <b>second</b> rate hike. </div>
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<div>The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, butMarket forecasts, on the other hand, are betting on a secular stagnation type of story -- r* remains zero for the next two years and monetary policy stance remai</div>
<div>the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has barely dented the trend in core inflation. </div>
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<div>The chart also shows that headline yoy inflation is likely to increase in the next couple -- unless the drop in oil prices is big enough to offset the drop in inflation observed in Nov/14-Jan/15 period. Even if headline inflation remains flat in the next couple of months, the yoy figure will increase from the current 0.4% to 1.4% in January.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/6b186ac6-a3f5-4524-9f1c-76e08ff35059.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/77397bdc-3858-44fe-9ea6-9de891a2e6eb.png" style="height: auto;"/></div>
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<div>Today's CPI print showed another increase in core inflation momentum (3-month annualized inflation). Core inflation momentum moved from 2.2% to 2.4%: </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/9d4e377b-8db1-4e69-9824-451d41cf6162.png" style="height: auto;"/></div>
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<div>Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/22364792-16bb-4f79-afc6-c60fd3d4430c.png" style="height: auto;"/></div>
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<div>But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.6% <i>lower</i> than a year ago while core services are 2.9% <i>higher</i>. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/74f77b98-5447-4835-85f0-8142058c3881.png" style="height: auto;"/> </div>
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<div>Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/26f009e2-a10b-4275-be95-77185ef27aae.png" style="height: auto;"/></div>
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<div>Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/cd102125-3ffe-4633-bc44-4aae58e3728d.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Sticky-Price CPI (a sign of anchored expectations)</span> <span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">is trending up</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "<i><u>appear to incorporate expectations about future inflation to a greater degree than flexible prices</u></i>".</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/5e8d61bc-1ae6-4159-b573-511f8badf28f.png" style="height: auto;"/></div>
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<div>Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/0ae4ecfc-6bd9-4914-86e1-37923a9906f3.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Market-based inflation expectations and compensation</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/3d01f091-db25-4ad7-98c5-8d66d96df7bf.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/dcaf2e10-cb0c-4e38-ad83-f25a831616c1/05725f43-c65e-4e40-ba99-ba4f78544510.png" style="height: auto;"/></div>
US Univ. of Michigan Sentiment: rich vs poorhttps://pgrahl.postach.io/post/us-univ-of-michigan-sentiment-rich-vs-poor2015-12-11T18:01:32.616000Z2015-12-11T17:34:26ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in December at 91.8, up 0.5 points from November.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Poor consumers are felling better about current situation.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Rich consumers are worried about the future.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">All think unemployment rate has reached a bottom.</span></li><li>The overall tone of the report was very positive (see quotes below). Current level of Sentiment is associated with real consumption growing at 3.25%.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Historical episodes show that real consumption grows in the 2.25%-4.5% range while Sentiment is near current levels.</span></li><li>5-10y inflation expectation at the 2.6% level.</li></ul><div><hr/></div>
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<div><u><i>Additional highlights in the report:</i></u></div><ul><li>"December gain was recorded among households with incomes in the bottom two-thirds (+2.7pp)"</li><li>"Sentiment Index among consumers with incomes in the top third declined (-4.4pp)"</li><li>"Largest loss was in how consumers judged prospects for the national economy the year ahead"</li><li>"Consumers anticipated somewhat lower wage gains and were less optimistic about continued declines in the unemployment rate"</li><li>"Two-thirds of all consumers expect interest rates to increase in the year ahead, a reading only comparable to the levels last recorded from 2004 to 2006"</li><li>"During the past three months, the average expected long term inflation rate (2.6%) was the lowest recorded in more than a quarter century"</li><li>"Less favorable prospects for the national economy were more frequently voiced by households with incomes in the top third"</li><li>"Regardless of income, consumers expect unemployment to edge slightly upward in the year ahead"</li></ul><div><br/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in December at 91.8, up 0.5 points from the November estimate.</span><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"> </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/17d7d37e-cc2f-4b3b-93d4-05c9d20d6b29/9f955e34-a940-4907-a655-a38e370f46d8.png" style="height: auto;"/><br/></span></div>
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<div><u><i><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking closer at the relationship between Michigan Sentiment and household consumption:</span></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 3.25%.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.25%-4.5% range, with a few outliers above this range and no episode of real consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/17d7d37e-cc2f-4b3b-93d4-05c9d20d6b29/d6e4ad67-dd89-46ac-bcb1-2059a3e9395a.png" style="height: auto;"/><br/></span></div>
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<div>Inflation expectations at 2.6%.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/17d7d37e-cc2f-4b3b-93d4-05c9d20d6b29/36bfe6b8-b12e-46a4-b8db-b0db677ecfa0.png" style="height: auto;"/></div>
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US Retail Sales -- excluding gasoline, retail sales are growing at a healthy 4.4%https://pgrahl.postach.io/post/us-retail-sales-excluding-gasoline-retail-sales-are-growing-at-a-healthy-4-42015-12-21T11:28:28.631000Z2015-12-11T16:04:54ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">November: advance retail sales rose 0.2%mom, <i>below</i> 0.3% market consensus; control group increased 0.6%mom <i>above</i> 0.4% consensus.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Trend growth remains unchanged:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of total retail sales ex gasoline stations increased from 4.3% to 4.4%.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of the 'control group' rose from 3.1% to 3.4%. </span></li><li>Both are very close to the 4-year growth pace: a resilient consumer!</li><li>Recall that retail prices are close to flat -- so the above growth rates are close to volume growth!</li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Inventory-to-sales ratio remained roughly flat (excluding gasoline).</span></li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The overall trend for retail sales remains unchanged. Excluding sales at gas stations the trend growth is healthy: 4.4% in the last year compared to 4.5% in the last 4 years (in <i>nominal terms</i>). </span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/c7c4b27f-8046-48f4-aeb1-c82e24722cea.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below compares total retail sales with retail excluding gasoline sales. It is clear that most of the slowdown in retail sales in the last few months was due to falling gasoline prices (similar to what has happened earlier in the year).</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/64437038-7c72-4155-8346-db152a5d5199.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking at the "control group" (total retail excluding auto dealers, bldg materials, gas stations) a similar growth picture emerges: 3.4% growth in the last year and 3.0% in the last 4 years.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/08cddb4b-8842-4c3d-a820-50a18c602ae5.png" style="height: auto;"/></div>
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<div>Excluding residual sales of gasoline from the control group reveals a 1pp growth gap. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/76317f0b-f81a-4310-a3aa-d896f36bf39f.png" style="height: auto;"/></div>
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<div>Also, it is important to recall that (control group) retail prices have been trending down in the last year...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/a503020c-1ac4-4a75-aed5-ec9a22506fca.png" style="height: auto;"/> </div>
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<div>...which results in a very healthy 3.6% growth rate in retail <b><i>volumes.</i></b></div>
<div><i><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/68fc9523-58e7-47d7-8f1b-57eadffd73f9.png" style="height: auto;"/><br/></i></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><u style="font-weight: bold;">Inventories:</u> stable if one excludes gasoline sales (latest: October)</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/d0a48d8a-08a2-4830-9b0f-50532178a803.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/4ac12b83-eeb2-4c08-8e83-091a61f6c597.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Extra charts</b></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below show retail and food services by kind of business. The red line is an index in log (averages zero in the period) so that a number 10 in the scale means sales are 10% higher than the period average. The red dashed line is the trend in the last 12 months and the blue bars (right scale) are the monthly percentage change. The headline is how the slope of the red dashed line has changed compared to last two months.</span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.1% (Aug) to 6.7% to 6.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/6d2939ba-e61f-4c5c-9828-7ad9861e9ed2.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.0% (Aug) to 5.5% to 5.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/b3a9aed1-b35c-4b9f-8683-54681190bad4.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from -4.6% (Aug) to -3.8% to -1.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/2bc649a4-1705-45ef-b197-f434f8f6c7ee.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 1.7% (Aug) to 3.4% to 3.0%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/b6f8d572-ca81-4b4e-bc7a-682d34ce9155.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 2.7% (Aug) to 1.9% to 1.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/4d9ddffd-b2cd-4ac6-ad4e-bc795ddfcf02.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.4% (Aug) to 4.0% to 3.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/6bde16e5-fdb7-41e2-83d5-0caf2b2fb280.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from -19.2% (Aug) to -14.2% to -11.6%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/878a5295-c7de-4a5b-a239-d17456dbf2f8.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.6% (Aug) to 2.6% to 1.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/d7a90ebd-235e-4f36-b301-731a78bba777.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.6% (Aug) to 6.0% to 7.0%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/e973fadd-ee29-4c7c-94e3-8eb929f29340.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 0.8% (Aug) to 2.0% to 2.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/3d08b6bc-2c2f-4c03-9951-1fa7ad41bca1.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 4.8% (Aug) to 3.9% to 2.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/218abf31-66f7-4afa-bbe1-261f51675e80.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.7% (Aug) to 6.7% to 7.2%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/3d0e4629-0529-4bcb-9174-dd63452bd372.png" style="height: auto;"/><br/></b></i></u></div>
<div><u><i><b><br/></b></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 7.4% (Aug) to 5.6% to 5.9%</u></i></b></span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/2649b371-2646-4901-bc90-91420c962fb5/f4ab5b5a-5589-4390-9b15-b6dc39613722.png" style="height: auto;"/></div>
US wholesale inventories led growth to be revised down by about one tenth in Q3 and Q4https://pgrahl.postach.io/post/us-wholesale-inventories-led-growth-to-be-revised-down-by-about-one-tenth-in-q3-and-q42015-12-10T13:20:48.091000Z2015-12-10T12:23:16ZPaulo Gustavo Grahl, CFA<div><hr style="display:none;-evernote-encp-section-break:true;"/></div>
<div><u>Main takeaways:</u></div><ul><li>Lower than anticipated wholesale inventories in October and downward revisions to the previous month led analysts to adjust GDP growth estimates slightly down in Q3 and Q4 by about one tenth. GDP growth tracking for Q4 is in the 1.5% to 2.0% range.</li><li>Wholesale sales are moving sideways (current prices) after a sharp drop earlier this year.</li><li>However, adjusting for prices, wholesale sales are now back to trend.</li><li>Inventory buildup is mostly due to petroleum. </li></ul><div><br/></div>
<div><hr/></div>
<div>The chart below shows that retail, wholesale and manufacturing sales, all slowed down materially since mid-2014.</div>
<div>Retail sales excluding gasoline is still growing at a reasonable pace (see <a href="http://www.evernote.com/l/AJHCQCAJmaZCsqOiJmVhujjYRGWvc4T-Ybw/">US Retail Sales -- trend remains unchanged Oct/2015)</a></div>
<div>So, let's take a closer look at wholesale sales.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1870ea37-0951-42e6-a718-ae9d01e175f0/6eb9c36f-e460-48d6-90a6-996148fef795.png" style="height: auto;"/></div>
<div><u><b><br/></b></u></div>
<div>Part of the slowdown in wholesale sales is clearly due to price effect. Adjusting for falling prices, wholesale sales were roughly flat from late 2014 to mid 2015 and now appears to be back to the trend observed since 2009.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1870ea37-0951-42e6-a718-ae9d01e175f0/a9005347-d977-420c-bd45-d155da682813.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1870ea37-0951-42e6-a718-ae9d01e175f0/17a9007c-cea7-4853-9d74-7590a8480e9f.png" style="height: auto;"/></div>
<div><br/></div>
<div>Another frequent concern is the inventory buildup at wholesalers. The chart below show that the inventory to sales ratio has increased sharply in the last three quarters. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1870ea37-0951-42e6-a718-ae9d01e175f0/2264b22e-5cbd-4a05-96c1-f6497b44b1a8.png" style="height: auto;"/></div>
<div><br/></div>
<div>But a similar price effect might be distorting oil inventories. Excluding autos, farm, and petroleum, the rise in the inventory-to-sales is less pronounced. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1870ea37-0951-42e6-a718-ae9d01e175f0/281ff2d8-dd6b-445a-8711-ec0103ec41be.png" style="height: auto;"/></div>
<div><br/></div>
US External Trade: Net exports likely to be a drag again in Q4 (Oct/15)https://pgrahl.postach.io/post/us-external-trade-net-exports-likely-to-be-a-drag-again-in-q4-oct-152015-12-04T21:14:48.667000Z2015-12-04T20:14:48ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Net exports likely to be a drag on growth again.</li><li>US exports are not losing market share, despite dollar strengthening that started mid-2014.</li><li>Weak US exports more likely reflect sluggish global trade. </li></ul><div><br/></div>
<div><hr/></div>
<div>Trade results for October, if repeated in the next couple of months, would lead to a material drag in Q4 growth again. Note, however, that periods of consistent drag from net exports were also observed in the 1997-2005 period -- see chart.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/dad060ae-3347-42f5-998f-c06070743232.png" style="height: auto;"/></div>
<div><br/></div>
<div>Imports are growing at a strong pace and exports collapsed in the turn of the year and remained roughly flat since then.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/e3de4179-47ce-49b7-9899-c56bc8087ad5.png" style="height: auto;"/></div>
<div><br/></div>
<div>The jump in import growth precedes the stronger USD and coincides with an upturns in job creation and consumption that happened in 2014 -- therefore not likely to be a strong consequence of the currency strength and import substitution (although it may play some role). </div>
<div> </div>
<div>The slowdown in exports, however, happened at the turn of the year, and therefore could potentially be a quick response to the strenghtening of the dollar that started in mid-2014. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/dd450c07-2dfa-4bbb-8304-df557f7e1b94.png" style="height: auto;"/></div>
<div><br/></div>
<div>However, the chart below shows that US exports are moving roughly in tandem with world exports...yes US exports relative to world exports dropped since the start of 2015, but the relative level is only 1.5% below the trend since the crisis. This means that the recent strengthening of the dollar is not causing a loss of US market share in world (volume) exports.</div>
<div> </div>
<div>Of course it could be just a matter of time for US exports to shrink relative to world exports, but the recent weak performance seems more likely a result of sluggish world trade rather than dollar strength.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/e34466eb-c292-4e73-a270-d1ccdcf10261.png" style="height: auto;"/></div>
<div><br/></div>
<div>Meanwhile, the ISM export orders do not suggest any upside in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/fd6eaeea-bdb9-4e69-b736-77bd6993aec9.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1c8e1cc6-abb2-454f-9b98-83dead79856d/04865ddf-b43d-4d66-9473-cdc124bcae31.png" style="height: auto;"/></div>
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<div><br/></div>
US November employment by categoryhttps://pgrahl.postach.io/link/us-november-employment-by-category2015-12-04T18:53:05.038000Z2015-12-04T18:47:22ZPaulo Gustavo Grahl, CFA<div style="box-sizing:border-box;"><h1 style="box-sizing:border-box;font-size:36px;margin:0.67em 0px;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;">November employment by category</h1><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">The charts below show employment by category. The blue line is total employment in the category, the orange bar is monthly change and the red line is the linear regression in the last two years.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><strong style="box-sizing:border-box;font-weight:bold;">Total payroll increased 211k in November</strong>, after a 298k growth in October (which was revised up from 271k). The trend for the last 6 months slowed from 280k/month by the end of last year to 213k in the 6 months to November.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><strong style="box-sizing:border-box;font-weight:bold;">Private payroll increased 197k in November</strong>, after 304k growth in October (revised up from 268k). The trend for the last 6 months slowed from 270k/month by the end of last year to 201k in the 6 months to November.</span></span></span></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Most of the slowdown in the pace of job creation was concentrated in the goods producing sector (mining and manufacturing); construction jobs are doing ok and the the services sector has, so far, not being affected by manufacturing slowdown. Overall, the 6-month pace of job creation in the goods sector slowed from 50k (at the end of last year) to close to zero, while in the services sector it slowed from 220k to 194k in the same comparison.</span></span></span></p><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Employment categories</h2><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:10px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Total nonfarm</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Total private</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Goods-producing</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Mining and logging</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Construction</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Manufacturing</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Private service-providing</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Trade, transportation, and utilities</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Wholesale trade</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Retail trade</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Transportation and warehousing</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Utilities</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Information</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Financial activities</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Professional and business services</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Temporary help services</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Education and health services</span></span></span></li><li style="list-style: none; display: inline"><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:0px;"><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Educational services</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Health care and social assistance</span></span></span></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Leisure and hospitality</span></span></span></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Other services</span></span></span></li></ul></li></ul></li><li style="box-sizing:border-box;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Government</span></span></span></li></ul></li></ul></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Charts</h2><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Total nonfarm (trend from 242.7 to 242.1 to 241.7/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/cb7c2110-5044-4d8f-a5d3-9661d7393abd.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Total private (trend from 235.6 to 235.0 to 234.5/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/fb4d0d9c-72ab-4022-91a3-93ed1d994555.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Goods-producing (trend from 34.8 to 32.4 to 30.4/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/5d9fd90d-68e5-40d6-b1f0-9a00fc31fdfb.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Mining and logging (trend from -1.1 to -1.5 to -2.0/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/1ab11177-db60-44e1-b026-675b616660d3.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Construction (trend from 22.4 to 21.8 to 21.7/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/8f4579a4-fb4e-48b6-b966-2e16ba5957b9.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Manufacturing (trend from 14.1 to 13.0 to 12.0/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/14e1e2e9-d607-4ef2-af44-1ab91a649969.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Private service-providing (trend from 200.8 to 202.6 to 204.1/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/fff58ac2-f26b-4502-a2e4-dc8e2fec2005.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Wholesale trade (trend from 7.9 to 7.8 to 7.5/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/30eaf25e-841a-49f5-bcbd-3652d3fd63a2.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Retail trade (trend from 24.0 to 23.9 to 24.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/0b0066d2-ca84-41d2-a951-38ff2e5aea62.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Transportation and warehousing (trend from 12.4 to 12.1 to 11.4/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/74a42bdd-2d0a-4d35-a70c-3f6293b47a93.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Utilities (trend from 0.7 to 0.7 to 0.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/212cc49f-2b02-4f40-b594-d3968882d364.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Information (trend from 3.9 to 3.8 to 3.9/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/e2566331-9105-4086-8faa-7c4cc9aa4b34.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Financial activities (trend from 11.6 to 11.8 to 12.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/3143cb6b-36be-44f8-9f57-5f3ed7ada23c.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Professional and business services (trend from 53.7 to 54.2 to 54.4/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/20e092ef-0f2e-4c6d-820c-8ee199fea526.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Temporary help services (trend from 11.9 to 11.7 to 11.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/3b2e46db-bd04-4f8f-aa07-bdd9861236ae.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Educational services (trend from 4.2 to 4.1 to 4.4/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/957e967c-4ee2-4381-9a2e-b54e80459528.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Health care and social assistance (trend from 39.1 to 40.9 to 42.3/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/1eb1bf81-fcbf-4f93-afde-a91f2503dfd2.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Leisure and hospitality (trend from 37.1 to 37.1 to 37.3/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/ab5e71b7-c5f9-4de2-8454-883f51b9a410.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Other services (trend from 6.2 to 6.1 to 5.8/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/2fcee716-2058-4f81-98db-6a611be411a9.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Government (trend from 7.0 to 7.1 to 7.2/m)</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3acc9e26-f9c6-488e-ace1-a9e606dd273a/d4ee92e8-bb86-40af-b62c-1725957de156.png" height="516" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="718"/></span></span></span></p><hr style="box-sizing:content-box;height:0px;margin-top:20px;margin-bottom:20px;border-width:1px 0px 0px;border-top-style:solid;border-top-color:rgb(238, 238, 238);"/><p style="box-sizing:border-box;margin:0px 0px 10px;"><span style="font-size: 14px;"><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="color: rgb(85, 85, 85);">Dr. Paulo Gustavo Grahl, CFA (2015-12-04)</span></span></span></p></div></div></div><br/>US November Payroll: changing the focus to the pace of rate increases...https://pgrahl.postach.io/post/us-october-payroll-changing-the-focus-to-the-pace-of-rate-increases2015-12-04T18:53:04.142000Z2015-12-04T13:48:15ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong>Main takeaways:</strong></span></div><hr/><div><ul style="margin-top: 0px; margin-bottom: 10px;"><li>Yellen's speech at the Economic Club of Washington on Dec 2 explained why she will vote for an increase in rates on December 16. There's nothing in today's job report that would make her change her mind.</li><li>A couple of months ago I took the view Aug/Sept plunge in job creation would reverse in time for a December liftoff: "<i>Since I believe the payroll slowdown is temporary and that global risks are likely to recede in the coming months, I think December is still the most likely date for moving out of the ZLB</i>". That's now a consensus.</li><li>The focus will now shift to the pace of increase thereafter, as the Fed wishes:</li><li style="list-style: none; display: inline"><ul><li>"what matters for economic outlook are the public's expectations concerning the path of the federal funds rate over time" (Yellen speech).</li></ul></li><li>But FOMC expected, in September's projections, around 100bp increase / year in the next couple of years; market expects, on average, around 50-60bp per year. The FOMC could move a bit towards markets in the next meeting, but the gap will remain large.</li><li>The risk of a very short hiking cycle is not trivial; but, barring a China colapse, I think odds are both the Fed and the markets will adjust expectations upwards by mid H1 2016.</li></ul></div>
<div><b><br/></b></div>
<div><strong>Establishment report:</strong></div>
<div><hr/></div>
<div><u>Private</u> payroll increased <b>197k</b> in November, <b>in line with</b> the bloomberg consensus. Net revisions were <i>positive</i> 52k.</div>
<div><br/></div>
<div>The table below shows the expected range for private payroll (excluding outliers), the monthly surprise and revisions to the last 3 months. The actual print is in "red" (an "x" when inside the expected range and a box when outside). </div>
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<div>It is interesting to see the shape of the gray area! The negative surprises in August and September led to a material downward change in market's expected range for private payroll. A positive surprise in October resulted in an opposite move.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/2d35e38e-f390-4fae-be5b-5d2f428aba8d.png" style="height: auto;"/></div>
<div><br/></div>
<div><u><b>Market has been on track forecasting the pace of job creation in the last 6 months!</b></u></div>
<div><u><b>(but actual number beat forecast in the last 3 months)</b></u></div>
<div>One can see that the average of the median expectations for the last 12 months was 212k/month, very close to the actual releases of 213k/month in the same period (after revisions, private payroll averaged 212k/month in the last 12 months).</div>
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<div>In the last 6 months the median expectations averaged 201k/months and the actual release averaged 193k (201k/month after revisions).</div>
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<div>In the last 3 months the median expectations averaged 188k/m and the actual release averaged 194k/month (222k/month after revisions).</div>
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<div><u><b>Payroll trend</b></u></div>
<div>The trend in private payroll (measured by the 12-month moving average) moved down to 212k/month from 226k/month (unrevised) in October. The chart below shows the current vintage (orange line) as well as the <i>real time</i> path observed in each of the last few months. </div>
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<div>It is clear that the pace of job creation has slowed from the excessively high pace observed in Q4 2014 and Q1 2015, but it is still well above the job growth observed in 2013 / early 2014.</div>
<div><br/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/96fc8b24-26bf-40c2-990c-4a16d3d557f8.png" style="height: auto;"/></div>
<div><br/></div>
<div>The chart below shows that annual growth rate in private payroll is growing at 2.1% yoy -- off the highs but is still a healthy pace of growth.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/0d70cae2-99b1-4f8e-ba68-e92f6b263bdb.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/9484ac1a-1022-41fd-8900-5361a58eb75f.png" style="height: auto;"/></div>
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<div>Job growth momentum is back to neutral after spending Q2 and Q3 in the negative area.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/9efcdbbe-748c-4fc3-8b64-41e1a419b6f8.png" style="height: auto;"/></div>
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<div><strong>Labor input:</strong></div><hr/><div>The volume of total hours worked in the economy recovered from September and is back on the trend since 2009. Total hours worked increased 2.2% (annualized) in the last 3 months (blue line in the chart below). </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/5fecaaad-6922-4f3f-9570-40681a77d427.png" style="height: auto;"/></div>
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<div>Hours worked in the goods sector have been roughly flat in 2015. Hours worked in the services sectors continued performing well.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/ce1fb007-6ea6-4cdd-ad36-77bae4688409.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/f2fd53a4-9f00-43e1-8b6d-71f25288786c.png" style="height: auto;"/></div>
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<div><strong>Wages:</strong></div><hr/><div>Wages for all employees rose by 2.3% yoy (vs 2.4% in October) and for production worker rose 2% yoy (vs 2.2% in October). Overall, as the chart below shows, average hourly earnings have consistently grown at about 2.1% p.a in the last three years.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/e8e624bc-9433-43f7-b87d-5adb553f8f4f.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/3784f491-2d67-48de-b998-c9684eb3c7b3.png" style="height: auto;"/></div>
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<div><strong>Household income:</strong></div><hr/><div>Good. Close to the trend observed in the last three years.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/ba05eabd-ddcc-44a7-afd9-04d51537feee.png" style="height: auto;"/></div>
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<div>Goods sector nominal income below trend.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/6dd37fe0-2c44-4cbf-bdf4-261d6e130f13.png" style="height: auto;"/></div>
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<div>Services sector income close to trend.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/7a03376a-9dcd-4684-8bfa-baece7e9e89c.png" style="height: auto;"/></div>
<div><br/></div>
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<div><strong>Household report:</strong></div>
<div><hr/></div>
<div>The labor force participation rate ticked up in November (to 62.5% -- see chart). </div>
<div>It is interesting to highlight that the most LFPR managed to do was to stabilize in 2014 -- a year in which job creation and labor market conditions improved quite substantially. If the LFPR resumes its structural downtrend it could put the Fed in a position where they see labor slack shrinking faster than what they forecast, despite a similar economic growth outlook.</div>
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<div>The broader measure of unemployment (U-6), which includes marginally attached, discouraged workers, and employed part time for economic reasons move slightly up in November, but overall it is falling <i>faster</i> than the headline unemployment.</div>
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<div>The median forecast for unemployment rate in the Fed's SEP (Summary of Economic Projections) is 4.8% for 2016, 2017 and 2018. <b>Assuming a flat LFPR, a forecast of 4.8% unemployment rate by the end of 2016 is compatible with average employment growth of 145k/month</b>, substantially lower than the current pace of job growth. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/cea513ee-44c1-42a1-bd1d-cce77bfecadf.png" style="height: auto;"/></div>
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<div>As a reference, even a slowdown in employment growth from 2.1% currently to 1.5% yoy (the floor observed since mid-2011 was 1.8% yoy) would be equivalent to monthly employment gains of 178k and this would lead to a 4.4% unemployment rate by the end of 2016. <i><u>Bottom line</u></i>: LFPR needs to rebound (or job creation to settle at a very low level) for a 4.8% unemployment forecast to be attainable.</div>
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<div> See detailed charts below:</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/ad6cad18-f89b-4f4e-a651-4c4bffd47a8d.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/46cafd35-1a6b-4de2-b834-85a7cb433caa.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/4b68debe-b1bf-4b9c-b7b5-d2db89546848.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/1076c6d6-7346-4a2f-adf9-8546deb0fdc7.png" style="height: auto;"/></div>
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<div>The chart below shows unemployment rate (and short-term unemployment) and the recent tightening cycles (yellow). The short-term unemployment rate is at the lows.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/986bd691-e9e5-46e0-b311-3d3379c48f2e.png" style="height: auto;"/></div>
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<div>Long term unemployment rate is improving faster. Moreover, the 'shadow' labor (i.e., the gap between U-6 and the headline unemployment rate) is also improving faster in the recent months. This is a clear sign that the labor market continues improving. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/7dd14c35-c4b4-4437-9826-6e930c69a9de.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/1399e231-18fe-4d0b-8fdf-498140af4a97.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/ed0a209f-cf35-422d-99f5-2c343face6ac/6e8e7012-6916-43fe-bcb5-c2c2a7cb36a0.png" style="height: auto;"/></div>
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US Personal Income and Outlays in October: income growing fast; consumption slowdown due to energyhttps://pgrahl.postach.io/post/us-personal-income-and-outlays-in-october-income-growing-fast-consumption-slowdown-due-to-energy2015-11-25T21:38:41.058000Z2015-11-25T20:09:48ZPaulo Gustavo Grahl, CFA<div><hr style="display:none;-evernote-encp-section-break:true;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div>
<div><hr/></div><ul><li>Income and spending trends broadly unchanged when comparing to the previous report. </li><li>Slowdown in consumption in September/October is due to energy:</li><li style="list-style: none; display: inline"><ul><li>Consumption of energy goods and services dropped 8.9% (not annualized) since August.</li><li>Excluding energy, consumption rose 0.6% in the two months (3.8% annualized).</li></ul></li><li>Consumption and income seem to have weathered well the spike in financial conditions.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Nominal (real) disposable income trend growth in the last 12 months growing at 4.2% (3.4%) and consumption trend growth at 3.7% (2.8%).</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Core nominal (real) consumption (ex food and energy) growing at 4.5% (3.2%) in the last 12 months.</span></li></ul><div><hr/></div>
<div><br/></div>
<div>Personal consumption excluding energy keeps growing...</div>
<div>...in current prices...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/2dd12fb9-56df-4cf1-93bd-b1a1fe95da1d.png" style="height: auto;"/></div>
<div><br/></div>
<div>...and volumes.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/331b85d2-281b-43c4-9c14-e45512a273d1.png" style="height: auto;"/></div>
<div><br/></div>
<div>So the slowdown in the previous couple of months is entirely due to energy. This mirrors the conclusion I had when looking only at the narrower retail sales data (<a href="http://bit.ly/1H0PWjc">US Retail Sales -- trend remains unchanged</a>.</div>
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<div>Income and spending (ex energy) are growing at roughly the same pace. But the slower pace of growth in total consumption (including energy) means savings rate is increasing. </div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/30c6d676-a1fe-4d00-8c38-47946d36db32.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Disposable income seems to be in a steady trend, while household consumption rebounded from the lows early in the year and is back to its previous trend growth.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 1a) Income and expenditures, nominal, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/e130baeb-12d9-4132-8bc1-5248ba9c9e54.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The growth trend in the last 12 months for disposable income rose to 4.2% in October (3.3% in September and 3.1% in June), while the growth trend for consumption moved up to 3.7% (from 3.6% in September and 2.6% in June).</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Cart 1b) Income and expenditures, nominal, last 2 years</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/409bb365-e5f5-45b7-8eb2-cd600e5f141b.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 2a) Income and expenditures, volume, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/34f40e60-8ff8-4568-8493-d1b400d692a6.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">When looking at volumes (constant prices) the trend growth in real disposable income rose to 3.4% in October (from 2.9% in September and 3.2% in July), while real consumption slowed to 2.8% (vs 3% in September and 2.8% in July).</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 2b) Income and expenditures, volume, last 2 years</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/9d21b3cc-bd7d-45c7-b66f-cde1731c6865.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><hr style="display:none;-evernote-encp-section-break:true;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below shows slightly different measures of income. Overall, all measures are growing at or above 5% in the last 6 months! </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 3a) Different measures / concepts of household income, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/64a388ba-22c9-40e9-b717-bf8d9a25e45c.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 3b) Different measures / concepts of household income, last 2 years</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/4d55452a-0b66-4dc7-86c5-743cd4dda2dd.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below shows that almost all the recent stagnation in consumption was due to 'energy' consumption.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 4a) Household consumption, core vs total, nominal, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/e0eecb7a-baed-486f-890b-53ff11c316ad.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 4b) Household consumption, core vs total, nominal, last 2 years</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/6d99abc2-d0ad-446a-90f7-c715372e7708.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 4c) Household consumption, core vs total, volumes, since 2010</b></span></div>
<div><hr/></div>
<div><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/2b32dd29-6577-4a87-824d-5187b270ca7f.png" style="height: auto;"/><br/></b></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 4d) Household consumption, core vs total, volumes, last 2 years</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/8e25de9c-0c3a-4d5c-9e72-abda00eb87bb.png" style="height: auto;"/></div>
<div><br/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Breaking household consumption into goods and services show that the recent soft patch was entirely due to goods consumption -- but take a look in the chart of volumes: it shows goods consumption growing faster than services.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 5a) Goods and services consumption, nominal, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/229d0853-3486-4c7d-ad02-e8283c3b5630.png" style="height: auto;"/></div>
<div><hr style="display:none;-evernote-encp-section-break:true;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 5b) Goods and services consumption, volume, since 2010</b></span></div>
<div><hr/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/15979f0b-860f-4847-a4e7-122b3f69fb83.png" style="height: auto;"/></div>
<div><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><hr style="display:none;-evernote-encp-section-break:true;"/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Digging further into goods consumption it is evident that most of the hit happened in nondurable (which includes gasoline), but when adjusting for prices nondurable goods seem to be back to the previous growth trend. </span></div></div><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 6a) Goods consumption (durables and nondurables), nominal, since 2010</b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/d863f3d4-2cf0-4d59-8ba6-b07641a54d6d.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 6b) Goods consumption (durables and nondurables), volume, since 2010</b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/ca21ef26-b7f9-4beb-bd3e-1015d10468d9.png" style="height: auto;"/></div>
<div><hr style="display:none;-evernote-encp-section-break:true;"/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Chart below focus only on nondurable goods (volume) to better spot the trends.</span></div></div><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Chart 6c) Goods consumption (nondurables), volume, since 2010</b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/0f3773d6-1d02-478d-a9f0-de4509380991/9f16521d-980c-465c-b284-9b6c4557bf46.png" style="height: auto;"/></div>
<div><hr style="display:none;-evernote-encp-section-break:true;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><br/></b></span></div>
<div><div><hr/><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div></div></div></div>World trade volumes remain sluggishhttps://pgrahl.postach.io/post/world-trade-volumes-remain-sluggish2015-11-25T13:12:15.489000Z2015-11-25T12:33:22ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><hr/><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">World trade volumes rebounded after the slowdown earlier in the year.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">But volumes are flat compared to last year.</span></li></ul><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Netherlands Bureau for Economic Analysis (CPB - Centraal Planbureau) has released world trade volume data for September. </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below shows world trade volumes picking up a bit since the first quarter contraction, but the overall message is still of a very sluggish trade.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 1a) Volume of world</i> trade <i>(exports & imports, seasonally adjusted)</i></b></span></div><hr/><div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/9d8e204a-9a80-47cc-80d2-2316d3b46646.png" style="height: auto;"/></div>
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<div><i><b>Chart 1b) Volume of world trade (seasonally adjusted)</b></i></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/aefde22d-04c6-4263-8a49-8d65d9540af1.png" style="height: auto;"/></div>
<div><i><b><br/></b></i></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below zoom in to the most recent four years to highlight the behavior of trade volumes at margin. Export trend growth in the last two years slowed from 2.4% to 2.1% (from July to September), while import trend growth slowed from 1.8% to 1.6% in the same comparison.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 2a) Volume of world </i>exports<i> (seasonally adjusted, last 4 years)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/c444fc5b-8e40-4e35-83b3-62e846bc0f55.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><br/></i></b></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 2b) Volume of world </i>imports<i> (seasonally adjusted, last 4 years)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/b332c2ad-fb9d-4293-a371-29e313a3ab7b.png" style="height: auto;"/></div>
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<div>The breakdown by country/region show that export volumes from the Euro Area have been very resilient while export volumes fell in the other regions. Imports have rebounded in most regions in recent months.</div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 3a) Export volumes by country / region (seasonally adjusted)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/78122d86-e4e4-4775-b4bd-fab02ccc4753.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i>Chart 4b) Import volumes by country (seasonally adjusted)</i></b></span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/60e10022-4073-41b9-9e9a-e0883440da8d/3ed99d39-ed24-479a-8236-3a87dedd1399.png" style="height: auto;"/></div>
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US Corporate Profits -- adjusting for FX valuation (updated with Q3 2015 results)https://pgrahl.postach.io/post/us-corporate-profits-adjusting-for-fx-valuation-updated-with-q3-2015-results2015-11-24T21:59:34.247000Z2015-11-24T21:39:22ZPaulo Gustavo Grahl, CFA<div><u><i>Main takeaways:</i></u></div><ul><li>Foreign profits represent 40% of domestic profits for US corporates.</li><li>Profits increased 1.4% p.a. since 2011.</li><li>Adjusting for currency valuation, profits increased 2.5% since 2011.</li><li>Profit growth in the last 4 quarters slowed in both measures: from 3.6% to 0.9% in headline profits and from 5.7% to 4.0% when adjusting for FX.</li></ul><div><hr/></div>
<div>Foreign profits represent about 40% of domestic profits (for US corporates, based on national accounts data).</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3e422bff-cb94-499e-a5a5-0b28817018a9/43d643a8-9156-4290-b0b6-e85c71116f2b.png" style="height: auto;"/></div>
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<div>The chart below adjusts the portion of the foreign profits for the currency effect (assuming that the currency composition of foreign profits is equivalent to the currency composition of the trade-weighted dollar calculated by the US Fed).</div>
<div>The "adjusted profits" show a slightly higher trend growth since 2011 -- 2.5% vs 1.4%.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3e422bff-cb94-499e-a5a5-0b28817018a9/02d3b36a-207d-4b1b-9146-8d2f5d3991ec.png" style="height: auto;"/></div>
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<div>Chart below shows the YoY growth of corporate profits with and without FX adjustment.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3e422bff-cb94-499e-a5a5-0b28817018a9/0d697014-258b-4b98-a8ba-58acaf9c2996.png" style="height: auto;"/></div>
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A closer look at US corporate profits and cash flow (part 2) (updated with Q3 2015 results)https://pgrahl.postach.io/post/a-closer-look-at-us-corporate-profits-and-cash-flow-part-2-updated-with-q3-2015-results2015-11-24T21:35:54.359000Z2015-11-24T20:57:03ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Numbers below are for <i><b>nonfinancial domestic corporate</b>.</i></li><li>After tax profits are $953bn (+1.8% yoy).</li><li>Nonfinancial domestic corporate net cash flow has increased recently to $1.7tn (+2.4% yoy).</li><li>The profit measure more closely associated with S&P500 reported earnings ticked down in 3Q15, but is up by 5.6% since last year.</li></ul><div><br/></div>
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<div>Charts below are for <i>Nonfinancial Domestic</i> Corporate sector -- the ones in "<a href="http://www.evernote.com/l/AJHk7UUVw2hF95sgjXvxfA84NGJfCa_x4Aw/">A closer look at US corporate profits and cash flow (updated with Q3 2015 results)</a>" are for <i>total</i> US corporate sector.</div>
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<div>Total nonfinancial domestic profits from current production currently at $1.3tn.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f2cddf05-fc8e-44b6-9fb5-078232494eb1/bc3877a2-b835-4ca6-bd09-b719c57a5a50.png" style="height: auto;"/></div>
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<div>Below total nonfinancial domestic profits from current production <i>after taxes</i>.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f2cddf05-fc8e-44b6-9fb5-078232494eb1/c3bed571-d06e-411c-90f9-1b8dc8a53ee7.png" style="height: auto;"/></div>
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<div>Out of the <s>$0.96tn</s> $0.94tn in after tax profits, <s>60%</s> 61.6% is dividends and <s>40%</s> 38.4% (<s>$390bn</s> $358bn) is saved.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f2cddf05-fc8e-44b6-9fb5-078232494eb1/1d82111a-5bdb-4b21-9dd7-7fce54491daf.png" style="height: auto;"/></div>
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<div>It is also possible to calculate cash flow -- which is undistributed profits puls depreciation less (net) transfers. It is a measure of internal funds available for investment.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f2cddf05-fc8e-44b6-9fb5-078232494eb1/f3e8f5f3-a2b3-4cd9-bad7-82bf77cf1704.png" style="height: auto;"/></div>
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<div>The national accounts also provide a measure of <i>profits after tax <u>without</u> IVA and CCAdj</i>. This is the measure often used in comparisons with the S&P measures of reported earnings.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/f2cddf05-fc8e-44b6-9fb5-078232494eb1/d2984473-1a75-4d95-b322-e29c613a7055.png" style="height: auto;"/></div>
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A closer look at US corporate profits and cash flow (updated with Q3 2015 results)https://pgrahl.postach.io/post/a-closer-look-at-us-corporate-profits-and-cash-flow-updated-with-q3-2015-results2015-11-24T21:33:05.320000Z2015-11-24T20:56:56ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>After tax profits are roughly flat at $1.5tn (since 2012).</li><li>(Net) dividends paid to other sectors is close to its historical average (as a share of profits).</li><li>Corporate net cash flow has increased recently (from $2tn mid-2013 to $2.2tn).</li><li>The profit measure more closely associated with S&P500 reported earnings ticked down in 3Q15, but is up by 4% since last year.</li></ul><div><br/></div>
<div><hr/></div>
<div>Let's take a look at what is happening with US corporate profits. But before, allow for a brief digression on what is and what is not calculated in the US National Accounts statistics.</div>
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<div>BEA's main measure of corporate profits is <u><i>profits from current production</i></u>. It provides a comprehensive and consistent economic measure of the income earned by all US corporations. It is unaffected by changes in tax laws, and it is adjusted for nonreported and misreported income. </div>
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<div><i>Profits from current production</i> is derived as the sum of (a) profits before tax ("book profits", based on tax-returns provided by the IRS; financial-accounting information is used for the most recent periods) , (b) inventory valuation adjustment (IVA), and (c) capital consumption adjustment (CCAdj).</div>
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<div><u><i>IVA:</i></u> gains or losses resulting from inventory withdrawals are not considered income from current production. The IVA converts business-accounting valuation of withdrawals from inventory to a current-cost basis by removing the capital gain or loss element that results from valuing these withdrawals at prices of earlier periods.</div>
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<div><u><i>CCAdj:</i></u> converts valuations of depreciation (based on tax code parameters) to valuations that are based on empirically based depreciation patterns, and convert the measures of depreciation to a current-cost basis by removing the capital gain or loss that arises from valuing the depreciation of fixed assets at the prices of earlier periods.</div>
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<div>Profits from current production can be "national" (including net profits / transfers "originating in the rest of the world") and "domestic". The profits component of domestic income excludes the income earned abroad by US corporations and includes the income earned in the US by foreign residents.</div>
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<div><hr/></div>
<div>From this digression I return with charts to illustrate the above mentioned components.</div>
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<div>Total profits from current production currently at just above $2tn.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/e4ed4515-c368-45f7-9b20-8d7bf17c0f38/9fe240a1-d9fa-4852-87ee-ca3dc7ad1784.png" style="height: auto;"/></div>
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<div>Below total <i>profits from current production</i> before and after taxes.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/e4ed4515-c368-45f7-9b20-8d7bf17c0f38/47b9ee8c-862e-4834-ad81-ca300a696a5b.png" style="height: auto;"/></div>
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<div>Out of the $1.5tn in after tax profits, <s>55%</s> 57.5% is dividends and <s>45%</s> 42.5% (<s>$700bn</s> $600bn) is saved.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/e4ed4515-c368-45f7-9b20-8d7bf17c0f38/6bbec8e6-fad9-4bee-91a3-314bbff3e16d.png" style="cursor: default; height: auto;"/></div>
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<div>It is also possible to calculate cash flow -- which is undistributed profits puls depreciation less (net) transfers. It is a measure of internal funds available for investment.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/e4ed4515-c368-45f7-9b20-8d7bf17c0f38/a1fa3d29-29ed-4d14-ab9e-0b8e6a9e8d1a.png" style="height: auto;"/></div>
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<div>The national accounts also provide a measure of <i>profits after tax <u>without</u> IVA and CCAdj</i>. This is the measure often used in comparisons with the S&P measures of reported earnings. It ticked down in Q3 15 but the one-year trend is still up.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/e4ed4515-c368-45f7-9b20-8d7bf17c0f38/e0b3c00a-4ed9-4661-af93-c0560abde9a4.png" style="height: auto;"/></div>
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US GDP: follow-up on Q3 2015 result (GDP Plus @ 2.9% QoQ)https://pgrahl.postach.io/post/us-gdp-follow-up-on-q3-2015-result-gdp-plus-2-9-qoq2015-11-24T20:54:13.420000Z2015-11-24T20:35:55ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Given recent concerns about seasonal adjustment and measurement problems, BEA has recommended looking at both GDP and GDI to infer the underlying state of the economy.</li><li>However, all the measures (GDP, GDI and GDP Plus) are currently showing a similar picture: an annual pace of growth just above 2%, slowing down from the 3% pace of late 2014.</li></ul><div><hr/></div>
<div>The highlights of the second GDP release for 3Q15 are in the link:</div>
<div><a href="http://www.evernote.com/l/AJEeuh5qN-JBqpQSLhm20sG9DHvUniIT--8/">US 3Q15 GDP (second release): revised up to 2.1% (from 1.5%); real GDI printed at a healthy 3.1% in the quarter and was revised up in Q2</a></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">As mentioned in the comment <a href="http://www.evernote.com/l/AJHc1d31ZGBNRKYiW5Uj4iYCKD8vn20rJ80/">US GDP: BEA working to improve growth statistics</a>, the statistics bureau is highlighting the usefulness of their estimate of <i>Gross Domestic Income</i> to get a better picture of the economy.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">This approach is also taken by <a href="http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-16.pdf">Aruoba, Diebold, Nalewaik, Schorfheide, and Song (ADNSS)</a> and is called <b>GDP Plus</b>. The authors view GDP and GDI as noisy measures of the underlying latent <i>true</i> GDP. The latest report estimates GDP Plus at 2.9% in the third quarter (QoQ, saar) and 2.3% compared to last year. </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">See the charts below comparing GDP, GDP Plus and a equally weighted average of GDP and GDI (as recently started to be published by BEA). As an interesting side comment, the charts below show that the GDP Plus estimate slowed down ahead of the GDP estimate before the GFC.</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9f3111b3-43fc-45f1-8bcd-ae99ce4ac4e2/47d7897a-8eb1-458f-9cc4-7a3b389dc036.png" style="height: auto;"/></div>
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US 3Q15 GDP (second release): revised up to 2.1% (from 1.5%); real GDI printed at a healthy 3.1% in the quarter and was revised up in Q2https://pgrahl.postach.io/post/us-3q15-gdp-second-release-revised-up-to-2-1-from-1-5-real-gdi-printed-at-a-healthy-3-1-in-the-quarter-and-was-revised-up-in-q22015-11-24T20:37:19.366000Z2015-11-24T13:54:10ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><u>Main takeaways:</u></b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">GDP is running above potential.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The good news is that GDI was revised up in Q2 (0.7% to 2.2%) and printed 3.1% in Q13 2015 and was revised up in Q2 (before revisions, GDI was running very weak -- a point which I mentioned as a concern last quarter).</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The value of goods and services purchased by US residents is growing at 2.8%.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Fear of inventory overhang: too much ado... (details below).</span></li></ul><div><br/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Third quarter GDP was revised up by 0.6pp, close to market consensus.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">As the table below highlights, the upward revision was mostly in inventories, partially offset by weaker net exports and services consumption.</span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>US GDP increased 2.2% yoy in Q3; trend in the last 2 years is 2.5%</b></span></div>
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<div><b>Domestic demand is growing at 2.8% yoy</b></div>
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<div><b>The good news was that GDI was revised up; it appeared to be flat from Q4 2014 to Q2 2015 but that was revised away</b></div>
<div>Indeed, 2Q 15 GDI growth was revised up from 0.7% to 2.2% qoq and Q3 15 GDI initial print was 3.1% qoq.</div>
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<div><b>The average of real GDP and real GDI increased 2.6 percent in the third quarter, compared with an increase of 3.0 percent (revised) in the second</b></div>
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<div><b>Both GDP and GDI are growing at 2% yoy</b></div>
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<div><b>Business value added slowed to 1.8% in Q3 15, but the overall 2.6% growth trend is unchanged</b></div>
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<div><b>Inventories</b></div>
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<div>There is a lot of concern regarding inventory accumulation in the US. JPM, for instance, wrote that</div>
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<div style="margin-left:40px;">"The mix of growth, however, is now less favorable for Q4 GDP, as real final sales were revised down from 3.0% to 2.7%, while inventory building was revised up from a $57 billion pace to <span style="background-color: rgb(255, 250, 165);-evernote-highlight:true;">an unsustainably hot $90 billion rate</span>. The bigger <span style="background-color: rgb(255, 250, 165);-evernote-highlight:true;">inventory overhang</span> helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5% estimate for current-quarter GDP growth."</div>
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<div>There are indeed reasons to be concerned about short-term quarter-on-quarter growth outcomes. I have looked at inventory-to-sales ratio in manufacturing, wholesale and retail sectors, and the big jump observed from late 2014 into 2015 in all the sectors seem to be mostly related to the energy sector. Of course there are sectors in which inventory level is too high and will need to be adjusted. Clothing is an example. But I think that translating that concern into a big worry for the US economy may not be appropriate.</div>
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<div>Let's take a look at the total economy.</div>
<div>The chart below shows that <i>inventory accumulation</i> in the Q3 2015 was 0.6% of final sales, which is <i>elevated by historical standards</i> (at least when comparing to the period of the great moderation).</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/1eba1e6a-37e2-41aa-9412-2e19b6d2c1bd/784b275e-1f4e-404f-9198-c9e7b393c66c.png" style="height: auto;"/></div>
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<div>So it may be the case that the pace of inventory accumulation slows down in the coming quarters. Since it's the change in inventory accumulation that impacts growth, it might be the case that inventories remain a drag to growth in the coming quarters. Indeed, the slowdown of inventory accumulation in the third quarter was already enough to subtract 0.6pp from growth (better than the initially reported drag of 1.4pp). If the current flow of inventory accumulation goes to zero over a one-year period, this would result in a drag of 0.8pp to GDP growth. </div>
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<div>However, the actual <i>level of inventories</i> (as opposed to the pace of inventory accumulation) does not seem particularly high. The ratio of inventories to final sales (nonfarm inventories) did increase from 2.14 at the end of 2014 to 2.18 in Q3 2015, but the overall picture seems to be of a flat inventory to final sales ratio in the aftermath of the financial crisis. </div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">A constant inventory-to-sales ratio at 2.18 would imply inventory accumulation of around $60bn, not very far from annualized pace of inventory accumulation observed in Q3 ($90bn). An adjustment to $60bn pace of inventory accumulation over a year would result in a small inventory drag to GDP growth of around 0.2pp over the same period.</span></div>
US Retail Inventories -- measurement error?https://pgrahl.postach.io/link/us-retail-inventories-measurement-error2015-12-21T11:28:37.390000Z2015-11-23T11:51:04ZPaulo Gustavo Grahl, CFA<div><span style="font-family: &apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;"><span style="font-size: 14px;"><span style="color: rgb(49, 126, 172);"><span style="font-size: 36px;">US Retail Inventories</span></span></span></span></div><div style="font-size: 16px"><div style="box-sizing:border-box;font-family:sans-serif;font-size:10px;-webkit-tap-highlight-color:rgba(0, 0, 0, 0);"><div style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-size:14px;color:rgb(85, 85, 85);background-color:rgb(255, 255, 255);"><div style="box-sizing:border-box;"><div style="box-sizing:border-box;"><p style="box-sizing:border-box;margin:0px 0px 10px;">There is a growing concern regarding the recent increase of inventories in the US economy, including in the retail sector. A recent article in the WSJ illustrates that: <a href="http://www.evernote.com/l/AJFJA_a-el1LK47yccocxKFsohwxPLK3a58/" style="box-sizing:border-box;background-color:transparent;color:rgb(47, 164, 231);text-decoration:none;">Retailers’ Full Shelves May Force Holiday Discounts</a>.</p><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Main takeaways</h2><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:10px;"><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Inventory/Sales ratio in the retail sector is increasing since 2012 and jumped substantially since late 2014.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Inventories are reported monthly for kind of business representing 80% of the total inventories in the sector.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Among these business, there is no common trend in the I/S ratio.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Consolidating all those business categories shows a stable I/S ratio in the aftermath of the recession and a minor jump by early 2015.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">So the uptrend (and jump in 2015) in I/S ratio is due to “others" – business for which the US Census Bureau does not report monthly breakdown on inventories.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Looking at the breakdown of sales in the “other" business, one can infer that lower gasoline sales (lower prices) are behind the drop in overall “other" sales.</strong></li><li style="box-sizing:border-box;"><strong style="box-sizing:border-box;font-weight:bold;">Meanwhile, the US Census Bureau estimates show “other" inventories growing at the same pace as overall inventories – this seems to be an <em style="box-sizing:border-box;">error</em> that is causing the I/S ratio for “other" business to increase materially and affect the shape of the overall I/S ratio that everyone is concerned about.</strong></li></ul><blockquote style="box-sizing:border-box;padding:10px 20px;margin:0px 0px 20px;font-size:17.5px;border-left-width:5px;border-left-style:solid;border-left-color:rgb(238, 238, 238);"><p style="box-sizing:border-box;margin:0px 0px 10px;margin-bottom:0px;">The bottom line is that the increase in I/S ratio in the retail sector is likely caused by an error in estimating gasoline inventories.</p></blockquote></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Facts</h2><div style="box-sizing:border-box;margin:0px 0px 10px;"><div>There’s not much information available on retail inventories. The annual survey breaks down total retail inventories in 12 groups and the monthly survey brings information on just 6 groups that account for around 80% of the total retail inventories.</div></div><div style="box-sizing:border-box;margin:0px 0px 10px;"><div>Total retail sales (excluding food services) was USD 395bn in September/15 (seasonally adjusted). This is equivalent to a pace of annual retail sales of USD 4.7tn (26% of GDP). Retail inventories were USD 584bn in Sep/15 (seasonally adjusted), representing around 1.5 months of sales.</div></div><p style="box-sizing:border-box;margin:0px 0px 10px;">The chart below plots the monthly seasonally adjusted inventories/sales ratio since Jan/1992. <img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/6062c72f-0960-4165-a894-c2c9ea79642a.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><div style="box-sizing:border-box;margin:0px 0px 10px;"><div>The chart shows that I/S ratio first reached a low of 1.34 months on Oct/2011 and has since increased to 1.48 months (Sep/2015).</div></div><div style="box-sizing:border-box;margin:0px 0px 10px;"><div>It is difficult to square the uptrend in I/S ratio observed since Oct/2011 with the comments in the WSJ report, which only mentions the most recent few months as a reason for concern. It could be the case that the initial build up on I/S ratio was a healthy adjustment in the aftermath of the crisis, but the recent pick up in inventories was an error… however this also does not match the fact that retail sales growth (excluding gasoline) continues in a healthy trend – see <a href="http://bit.ly/1H0PWjc" style="box-sizing:border-box;background-color:transparent;color:rgb(47, 164, 231);text-decoration:none;">US Retail Sales – trend remains unchanged (Oct/2015)</a>.</div></div></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Breakdown of I/S ratio</h2><p style="box-sizing:border-box;margin:0px 0px 10px;">Total retail inventories are split into the following kind of business:</p><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:10px;"><li style="box-sizing:border-box;">motor vehicle and parts dealers (33%)</li><li style="box-sizing:border-box;">general merchandise stores (15%)</li><li style="box-sizing:border-box;">building materials (9%)</li><li style="box-sizing:border-box;">clothing (9%)</li><li style="box-sizing:border-box;">food and beverages (8%)</li><li style="box-sizing:border-box;">furniture,electronics and appliances (5%)</li><li style="box-sizing:border-box;">others (21%)</li></ul><p style="box-sizing:border-box;margin:0px 0px 10px;">Motor vehicle and parts dealers alone account for about one-third of the retail inventories, but the chart below shows that the increase in inventories/sales is not related to the auto sector (indeed, I/S for the motor vehicle sector has been sideways).</p><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/94c87c61-34bc-4f5c-a04f-bdee0c42462f.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Motor vehicle and parts dealers</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/38c80d44-ad3a-42a0-b452-7d95ff1b3634.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">General merchandise stores</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/e1b33a6d-67d1-46ea-a901-c1f8e4cb0df0.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><div><span style="color: rgb(49, 126, 172);"><span style="font-size: 24px;">Building materials, garden equip. and supplies dealers</span></span></div><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/c13d6995-1aab-48c0-b977-f9594c127fd3.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Clothing and clothing access. stores</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/7fa0cc93-c685-4cac-af79-03ba6f3f2d54.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Food and beverage stores</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/c11a58ab-069d-4b00-bdf0-8f47300dd9b4.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Furniture, home furn, electronics, and appliance stores</h3><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/fd4cb3cc-3fae-4fd2-8099-f979f3eac217.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div><div style="box-sizing:border-box;"><h3 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:24px;">Others</h3><p style="box-sizing:border-box;margin:0px 0px 10px;">The remaining category “others" is calculated by residual since its breakdown is not available in the monthly data. The “other" group includes health and personal care; gasoline stations; sporting goods, hobby, book and musical instrument; miscellaneous retailers; nonstore retailers (mail order, online).</p><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/0a85916d-af7c-4453-a126-fecb6068a663.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p></div></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Additional comments</h2><p style="box-sizing:border-box;margin:0px 0px 10px;">One can see that increasing inventories in clothing stores and “others" seem to be behind the overall increase in I/S ratio. Unfortunately, there’s no individual kind of business that dominates the “others" inventories. Based on annual data, “others" inventories are split in:</p><ul style="box-sizing:border-box;margin-top:0px;margin-bottom:10px;"><li style="box-sizing:border-box;">nonstore retailers (30%)</li><li style="box-sizing:border-box;">health and personal care stores (30%)</li><li style="box-sizing:border-box;">sporting goods, hobby, and music instrument stores (17%)</li><li style="box-sizing:border-box;">miscellaneous store (14%)</li><li style="box-sizing:border-box;">gasoline stations (10%)</li></ul><div style="box-sizing:border-box;margin:0px 0px 10px;"><div>The chart below plots the I/S ratio for total retail sales excluding motor vehicles and “others". One can see that there was an increase in I/S ratio from late 2014 early 2015 but there is stability in recent months. Moreover, the increase in I/S ratio is materially less pronounced than what is observed in the total I/S ratio (see first chart at the top).</div></div><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/e61e5300-6489-45de-b6c2-e95a42714549.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><p style="box-sizing:border-box;margin:0px 0px 10px;">The next chart plots the sales of the “other" categories relative to the total retail sales excluding “other" and vehicles.</p><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/47127f40-4b50-4dc5-a9a3-e6f55c09eb63.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><p style="box-sizing:border-box;margin:0px 0px 10px;">The next chart plots the inventories of the “other" categories relative to the total inventories excluding “other" and vehicles.</p><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/aff168c0-81a7-4759-a3c1-c1993e3e8d8c.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><p style="box-sizing:border-box;margin:0px 0px 10px;">The charts above illustrate several interesting economic shifts. For instance, the downtrend in I/S ratio of the “other" categories from 2000 to 2008 was led by a faster increase in sales of the “other" categories relative to total sales. This is very likely the result of increasing e-commerce. Indeed, the share of nonstore retailers' sales in the “other" category increased steadily from 25% in 2000 to 38% in 2014.</p><p style="box-sizing:border-box;margin:0px 0px 10px;">But for the purpose of understanding why I/S ratio in the “other" categories jumped in late 2014, we need to look further.</p><p style="box-sizing:border-box;margin:0px 0px 10px;">The chart below excludes gasoline sales (gas stations and fuel dealers) from the “other" category and plots its sales relative to total sales excluding vehicles and “other". The result? “Other" sales are <strong style="box-sizing:border-box;font-weight:bold;">booming!</strong></p><p style="box-sizing:border-box;margin:0px 0px 10px;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a7092cab-2191-4204-acb7-9aecb5d38c16/9f08ef4a-f3a2-41e1-a5ad-01e2cefc2404.png" height="415" style="box-sizing: border-box; border: 0px; vertical-align: middle; max-width: 100%; height: auto;" width="672"/></p><p style="box-sizing:border-box;margin:0px 0px 10px;">The charts above show that “other" inventories are increasing at the same pace of overall inventories but “other" sales collapsed. We learned that the collapse in “other" sales is due to gasoline sales – indeed, “other" sales excluding gasoline are increasing faster than the remaining sales. Unfortunately, the US Census Bureau does not measure monthly gasoline inventories (it is only measured annually) and it seems that they are failing to account for the drop in gasoline inventories as measured in current dollars – since there is no reason to believe that the <em style="box-sizing:border-box;">volume</em> of gasoline inventories has increased substantially in the retail sector to offset the fall in gasoline prices.</p></div><div style="box-sizing:border-box;"><h2 style="box-sizing:border-box;font-family:&apos;Helvetica Neue&apos;, Helvetica, Arial, sans-serif;font-weight:500;color:rgb(49, 126, 172);margin-top:20px;margin-bottom:10px;font-size:30px;">Conclusion</h2><p style="box-sizing:border-box;margin:0px 0px 10px;">The overall tentative conclusion from the charts above is that <strong style="box-sizing:border-box;font-weight:bold;">gasoline inventories are mismeasured and, therefore, are distorting the overall inventory/sales ratio</strong> in the retail sector.</p><hr style="box-sizing:content-box;height:0px;margin-top:20px;margin-bottom:20px;border-width:1px 0px 0px;border-top-style:solid;border-top-color:rgb(238, 238, 238);"/><p style="box-sizing:border-box;margin:0px 0px 10px;">Dr. Paulo Gustavo Grahl, CFA (2015-11-23)</p></div></div></div></div></div></div><br/>FOMC minutes: getting ready for a 'dovish hike'https://pgrahl.postach.io/post/fomc-minutes-getting-ready-for-a-dovish-hike2015-11-18T22:16:04.790000Z2015-11-18T20:10:45ZPaulo Gustavo Grahl, CFA<div>Minutes from the October meeting hint at an FOMC that is aiming at a <u>dovish hike</u> in December.</div>
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<div>Dovish because: (a) it seems likely that they will emphasize the low equilibrium real rates as a reason for "keeping the target federal funds rate below the levels the Committee views as normal in the longer run" even after full employment and 2% inflation, and (b) it appears likely that a message will be sent that the Fed will not run out of ammunition and it would be ready to reverse course if economy unexpectedly weakens (perhaps "unconventional" policies will become "conventional"?).</div>
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<div>The point (b) above is important because it might be what is needed for the 'doves' to be on board for voting for a hike next month.</div>
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<div><b><u>Main takeaways from the Committee:</u></b></div><ul><li>Decision to be on hold explained:</li><li style="list-style: none; display: inline"><ul><li><i>Almost all members</i> agreed it was appropriate to wait for additional information to clarify whether the recent deceleration in the pace of progress in the labor market was transitory or reflected more persistent factors (note: the October report, released <i>after</i> the meeting, was probably enough to conclude deceleration was transitory).</li><li>Also, in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information.</li></ul></li><li>How much further progress in labor market is needed?</li><li style="list-style: none; display: inline"><ul><li>Members expressed <i>a range of views</i> regarding the extent of further progress in labor market indicators they would need to see to judge it appropriate to raise the target range for the fed funds in December.</li></ul></li><li>How much progress toward 2 percent inflation?</li><li style="list-style: none; display: inline"><ul><li>The same <i>bla bla</i> that members anticipate inflation would gradually return to 2% over the medium term.</li><li>But minutes mentioned that <i>most of the members</i> were not yet sufficiently confident of that to begin increasing rates.</li><li>A <i>couple of members</i> expressed concern about the continued decline in market-based measures of inflation compensation. "Moreover, the risk was noted that downward pressures on inflation from the appreciation of the dollar could persist".</li><li>The October CPI report, however, has shown all the measures of core inflation rising (see <a href="http://bit.ly/USOctCPI">http://bit.ly/USOctCPI</a>).</li></ul></li><li>Changes to postmeeting statement:</li><li style="list-style: none; display: inline"><ul><li>FOMC changed its near-term policy path from the assessment that would be needed to determine "how long to maintain the current target range" to what would be needed to determine "whether it would be appropriate to raise the target range at its <u>next meeting</u>".</li><li>The idea was to convey the information that rates would be increased IF: (a) unanticipated shocks do not adversely affect economic outlook, and (b) incoming data support expectation labor market will continue to improve and inflation will return to 2%.</li><li>So the goal was to leave policy options open for December; but <i>a couple of members</i> worried this could be signaling too strongly that rates would be increased in December. </li></ul></li></ul><div><u><b><br/></b></u></div>
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<div><u><b>Discussion on equilibrium real rates (r*)</b></u></div><ul><li>The staff briefed the participants regarding the concept of an equilibrium real interest rate (r*).</li><li>Conclusions leaned towards:</li><li style="list-style: none; display: inline"><ul><li>r* was negative in the aftermath of the 2008-09 financial crisis and <u>is currently close to zero</u>.</li><li>Equilibrium level of r* would likely remain low relative to estimates before the financial crisis (due to productivity and demographic factors).</li></ul></li><li>Policymakers made a number of observations:</li><li style="list-style: none; display: inline"><ul><li>actual levels of short-term real rate <u>has been below</u> r* (but not substantially below), consistently with estimates that r* is currently close to zero. </li><li>a <i>number of participants</i> expect r* to rise as the expansion continues (but probably only gradually).</li><li>r* will not go back to pre-crisis levels (this is why the <i>dot</i> for long run nominal fed funds has been falling in Fed's forecasts).</li><li>Lower r* imply rates will be closer to the ZLB --- and this "might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough".</li><li>Therefore "some participants noted that it would be <u>prudent to have additional policy tools</u> that could be used in such situations".</li></ul></li></ul><div><br/></div>
<div>According to the Taylor rule mentioned by Yellen on her remarks earlier this year, even considering r*=0 (the <b><span style="color: rgb(65, 173, 28);">green line</span></b> in the chart below) the Fed would already be behind the schedule. An r*=0 (and current readings on PCE inflation and unemployment rate) would imply fed funds at 0.75% in Sept/15 and 1% by December (based on Fed's forecasts). </div>
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<div>This might be what Fischer had in mind when he mentioned last week that monetary policy has already responded to the dollar appreciation and foreign weakness "through deferring liftoff relative to what was expected".</div>
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<div style="text-align: center"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/a667ef2b-48e9-4681-a46f-a29b1456f2fd/a6b21160-f31b-4095-b858-a1e4fc09ce24.png" style="height: auto;"/></div>
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<div><u><b>Participants' Views:</b></u></div><ul><li>There was a lot of talk about the labor market in the aftermath of a slowdown in job gains in August and September, and the discussion centered on whether it was temporary or more persistent. Hawks and doves made the usual arguments. </li><li>There was somewhat widespread concern with downside risks to inflation (mentioning market-based measures of inflation compensation).</li><li>Arguments against delaying increasing rates were presented: delay could increase uncertainty in financial markets, unduly magnify the importance of the beginning of policy normalization, increasing risk of a buildup of financial imbalances, decision to delay could be interpreted as signaling lack of confidence in the US economy, could erode FOMC credibility, progress should be measured in light of the cumulative gains without placing excessive weight on month-to-month changes in incoming data.</li><li>Arguments for delaying were also presented: downside risks to the outlook remained, concerns about loss of momentum in the economy, that inflation might fail to increase, uncertainty about whether growth was robust enough to withstand potential adverse shocks given limited ability of monetary policy to offset such shocks, concern that beginning of normalization might be associated with unwarranted tightening of financial conditions -- risk management considerations would call for caution, premature tightening might damage FOMC credibility to reach 2% inflation.</li><li>From the size of the previous two bullets, one may infer the arguments are balanced.</li><li>But the more important, perhaps, was that "<u>several participants</u>" think it would be prudent to <u>consider options for providing additional policy accommodation if the economic outlook were to weaken</u> and undermine progress in labor market conditions and reaching 2% inflation.</li></ul><div><br/></div>
US Inflation: Are we there yet? Yep (Oct/2015)https://pgrahl.postach.io/post/us-inflation-are-we-there-yet-yep-oct-20152015-11-17T19:43:35.334000Z2015-11-17T17:44:19ZPaulo Gustavo Grahl, CFA<div><b>Main takeaway:</b></div><ul><li>Core CPI inflation momentum rose to 2.2% (annualized). The last two months hit 2.7% (ar).</li><li>Core services inflation increased from 2.5% yoy in June to 2.8% yoy in October. Core goods are down 0.7% yoy.</li><li>Sticky-price CPI (a sign of anchored expectations) is trending up.</li><li>Is that enough to be <i>reasonably confident</i> inflation will move back to its 2% objective? </li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Fed's criteria for raising rates:</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><blockquote style="margin: 0 0 0 40px; border: none; padding: 0px;"><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen <b>further improvement in the labor market</b> and is <b>reasonably confident that inflation will move back to its 2</b> percent objective over the medium term."</span></div></blockquote><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">So Fed needs to be <b>reasonably confident</b> inflation will move back to 2%. Are we there yet?</span></div>
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<div>A month ago, Fed <span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">comments suggested the Fed was getting increasingly worried about downside risks to inflation (due to oil prices, strong dollar, slowdown in economic data). More recently, the message was more upbeat and a few Fed speakers even mentioned the keyword -- saying they were getting confident inflation would converge to target.</span></div>
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<div>Today's CPI print showed an increase in core inflation momentum (3-month annualized inflation) and thus should increase Fed's confidence. Core inflation momentum moved from 2% to 2.2% -- but the annualized inflation in the last two months is an even higher 2.7%: </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/3dbfb020-e870-4f16-a88c-6170d9917142.png" style="height: auto;"/></div>
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<div>Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/17d4fa20-13b2-41b3-8c16-2eff52ed82ac.png" style="height: auto;"/></div>
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<div>But behind the stability in YoY core inflation there's a growing divergence. Core goods are <i>0.7% lower</i> than a year ago and core services are <i>2.8% higher.</i> Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/e10d36ec-dcb8-4716-bc97-d5d6a9d73f3b.png" style="height: auto;"/></div>
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<div>Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/bcbecd68-75ba-4dfc-9041-766feb43ca01.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Sticky-Price CPI (a sign of anchored expectations)</span> <span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">is trending up</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "<i><u>appear to incorporate expectations about future inflation to a greater degree than flexible prices</u></i>".</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/0a0082a9-7dbd-41e3-9e34-3e680825ad45.png" style="height: auto;"/></div>
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<div>Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/bffd65dc-723b-48c8-981b-16b6d1f7e557.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Market-based inflation expectations and compensation</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/a09d7184-f085-464c-ae4c-ffd84b7d86fb.png" style="height: auto;"/></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/03651eea-88e8-4af5-8b83-cd4bcef8981f/f51339da-0013-444f-a4b6-9af5b811f81a.png" style="height: auto;"/></div>
US Industrial Production: non-energy production rebounded in October/2015https://pgrahl.postach.io/post/us-industrial-production-non-energy-production-rebounded-in-october-20152015-11-17T17:35:55.508000Z2015-11-17T14:33:19ZPaulo Gustavo Grahl, CFA<div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong>Main takeaways:</strong></span></div><ul><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Industrial production fell 0.2% in October, largely due to energy.</span></li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Non-energy IP rose 0.4% in the month. Co</span><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">re manufacturing rose 0.3%. Both were revised up in Aug/Sept.</span></li><li>Core manufacturing is growing a bit above 2% -- not too far from the 1.4% annualized growth observed since 2010.</li><li><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">ISM / Markit surveys and Conference Board leading indicator do not suggest upside for industry in the near term.</span></li><li>Weakness in oil sector and strong dollar remain a concern.</li></ul><div><span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><strong><br/></strong></span></div>
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<div>Industrial production fell 0.2% mom in October, largely due to energy. Non-energy industrial production rose 0.4% mom October and the previous two months were revised up:</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/0ea88017-e212-412d-8507-c865e35092e6.png" style="height:auto;" width="679"/></div>
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<div>Core manufacturing production (excluding vehicles and hi-tech) rebounded 0.3% mom and was also revised upward:</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/09c29ffb-70bb-4cda-b727-5f1acf500986.png" style="height:auto;" width="692"/></div>
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<div>A longer time-series of core manufacturing shows production growing at 2.3% -- not too bad, given the average growth of 1.4% since 2010.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/5df43860-5002-436c-9fa3-ff419b0d5141.png" style="height: auto;"/></div>
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<div>What about the upcoming months? Can we expect any improvement?</div>
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<div>The manufacturing surveys (ISM, Markit) have diverged in recent months, with Markit holding steady and ISM falling. The growth pace of industrial production, however, already seems aligned with the weak ISM figures. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/867b0203-25b1-47c8-b5db-ae47fa9feaa8.png" style="height: auto;"/></div>
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<div>A simple linear regression with the ISM does not suggest upside in the near term.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/6686cb16-7e8f-4194-9181-d91156f69e2e.png" style="height: auto;"/></div>
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<div>The <span style="-ms-word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Conference Board leading indicators are also catching down with weak industrial activity.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/4a06e9dd-c610-41d3-9763-189dedc69a9d.png" style="height: auto;"/></div>
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<div>The diffusion index of industrial production tends to lead actual production by a few months, but it weakened in the last couple of months -- reducing the room for upside surprises in total production.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/f8177a23-065e-42d6-9ae9-3bd51a74cde4.png" style="height: auto;"/></div>
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<div>Weakness in the oil sector and USD strengthening continue to weight on industrial activity. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/b2d765e5-3b78-47e0-9658-05983fb387ad.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/535ca732-1a3f-405a-9f99-712c48b05b86/bab1e339-2454-4dfa-b8dd-3d37f225b9ab.png" style="height: auto;"/></div>
US Univ. of Michigan Sentiment: consumer upbeat; inflation expectations remain at lowest rate ever recordedhttps://pgrahl.postach.io/post/us-univ-of-michigan-sentiment-consumer-upbeat-inflation-expectations-remain-at-lowest-rate-ever-recorded2015-11-13T20:10:58.795000Z2015-11-13T19:30:18ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in November at 93.1, up 3.1 points from the October estimate.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">This was largely due to a stronger outlook for the domestic economy.</span></li><li>The overall tone of the report was very positive (see quotes below). Current level of Sentiment is associated with real consumption growing at 3.5%.</li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Historical episodes show that real consumption grows in the 2.5%-4.5% range while Sentiment is near current levels.</span></li><li>5-10y inflation expectation remained at the 2.5% level, the <u>lowest rate</u> ever recorded.</li></ul><div><hr/></div>
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<div><u><i>Additional highlights in the report:</i></u></div><ul><li>"The largest gains were among households with incomes in the bottom two-thirds of the distribution"</li><li>"Sentiment gain among households with incomes in the top third rose marginally"</li><li>"Buying plans for large discretionary purchases improved"</li><li>"Six-in-ten consumers expect interest rates to increase in the months ahead; that proportion has not increased in the past few months"</li><li>"Assessments of current personal finances improved in early November"</li><li>"For the second month, consumers anticipated an annual long term inflation rate of 2.5%, which ties the lowest rate ever recorded"</li><li>"The decline in the near term inflation rate appears to have been due to consumers finally becoming less skeptical that gas prices will actually remain at current lows in the year ahead"</li><li>"Consumers reported more positive economic developments in early November, primarily about gains in employment, as well as fewer negative reports about domestic stocks, the global economy and international trade"</li><li>"The majority of consumers anticipated that good times would persist uninterrupted by any downturns over the next five years"</li></ul><div><br/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Preliminary Michigan Sentiment in November at 93.1, up 3.1 points from the October estimate.</span><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"> </span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3039a6d8-c776-40b2-a8e6-eebd54d38dbc/ab8293aa-7399-4492-bb83-9e862a128725.png" style="height: auto;"/><br/></span></div>
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<div><u><i><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking closer at the relationship between Michigan Sentiment and household consumption:</span></i></u></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 3.5%.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.5%-4.5% range, with a few outliers above this range and no episode of real consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.</span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3039a6d8-c776-40b2-a8e6-eebd54d38dbc/d87d3841-5f10-40ac-b356-450c12e65d9b.png" style="height: auto;"/><br/></span></div>
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<div>Inflation expectations remained at 2.5%, the lowest rate ever recorded (touched briefly in Sep/2002)</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/3039a6d8-c776-40b2-a8e6-eebd54d38dbc/6e29cc39-39a0-405c-82c3-0957ddbf6ac8.png" style="height: auto;"/></div>
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US Retail Sales -- trend remains unchanged (Oct/2015)https://pgrahl.postach.io/post/us-retail-sales-trend-remains-unchanged-oct-20152015-12-10T13:18:03.564000Z2015-11-13T18:25:35ZPaulo Gustavo Grahl, CFA<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Main takeaways:</b></span></div><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">October: advance retail sales rose 0.1%mom, below 0.3% market consensus; control group increased 0.2%mom vs 0.4% consensus.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Despite being below consensus, trend growth is unchanged:</span></li><li style="list-style: none; display: inline"><ul><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of total retail sales ex gasoline stations increased from 4.2% to 4.3%.</span></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">12-month growth of the 'control group' unchanged at 3.1%. </span></li><li>Both are very close to the 4-year growth pace: a resilient consumer!</li></ul></li><li><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Inventory-to-sales ratio remained stable.</span></li></ul><div><hr/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Despite the weaker than expected monthly figures, the overall trend for retail sales remains unchanged. Total retail sales are flat in the last three months, but excluding sales at gas stations the trend growth is healthy: 4.3% in the last year compared to 4.5% in the last 4 years (in <i>nominal terms</i>). </span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/0f61b558-b623-400f-9ec2-36593561385d.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The chart below compares total retail sales with retail excluding gasoline sales. It is clear that most of the slowdown in retail sales earlier in the year and the recent flattening were due to falling gasoline prices.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/9a3eabc1-bead-46b3-8755-2c72b53d1e3d.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Looking at the "control group" (total retail excluding auto dealers, bldg materials, gas stations) a similar growth picture emerges: 3.1% growth in the last year and 3.0% in the last 4 years.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/6f8117fc-ef32-4f29-9225-d7c9f8c35d69.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">Revisions to the previous two months were a small positive.</span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/930c50da-0446-46d4-8301-02f300f96e78.png" style="height: auto;"/></div>
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<div>Excluding residual sales of gasoline from the control group reveals a 1pp growth gap. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/75319b7c-2a64-42f0-8201-e5c4542211a6.png" style="height: auto;"/></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><u style="font-weight: bold;">Inventories:</u> stable if one excludes gasoline sales (latest: September)</span></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/122453f9-aff7-4bea-82d6-ee846c70d3e6.png" style="height: auto;"/></div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/299b2a05-3c19-425e-8520-589ec0191a02.png" style="height: auto;"/></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b>Extra charts</b></span></div><hr/><div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;">The charts below show retail and food services by kind of business. The red line is an index in log (averages zero in the period) so that a number 10 in the scale means sales are 10% higher than the period average. The red dashed line is the trend in the last 12 months and the blue bars (right scale) are the monthly percentage change. The headline is how the slope of the red dashed line has changed compared to last two months.</span></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><br/></span></div>
<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.1% (Aug) to 6.7%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/1597d04a-a01e-4f8a-ba09-c4984cdbb721.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.0% (Aug) to 5.5%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/4de3d459-581f-48e7-96b4-72631c9dc3af.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from -4.6% (Aug) to -3.8%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/57001da5-90f0-4673-bf25-e18b608066b0.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 1.7% (Aug) to 3.4%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/ac915dfc-883d-436e-b724-008ca2391afd.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 2.7% (Aug) to 1.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/625b281a-30ac-4f2e-bb96-cec863521335.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.4% (Aug) to 4.0%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/fe5c0a3e-5fb3-444d-b468-890abbeb3832.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from -19.2% (Aug) to -14.2%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/6f3a5f60-c338-4139-af43-b82f8053d8f3.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 3.6% (Aug) to 2.6%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/58dd0fe5-baa4-49bf-83ab-6e479499c265.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 5.6% (Aug) to 6.0%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/22b6c2fd-75d4-4831-a3a0-ea7bd77951da.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 0.8% (Aug) to 2.0%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/12212f02-ec42-4819-ad46-859869a72001.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 4.8% (Aug) to 3.9%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/7d9b3020-5e66-44bb-b5fc-bc4e14c02a96.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend moved from 6.7% (Aug) to 6.7%</u></i></b></span></div>
<div><u><i><b><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/38dd594b-2a8f-4848-8b62-838e7362e3d4.png" style="height: auto;"/><br/></b></i></u></div>
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<div><span style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;"><b><i><u>Last 12 months trend from 7.4% (Aug) to 5.6%</u></i></b></span></div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/c2402009-99a6-42b2-a3a2-266561ba38d8/c138440e-193b-4971-a928-3d9158b520e9.png" style="height: auto;"/></div>
Global industrial trendshttps://pgrahl.postach.io/post/global-industrial-trends-22015-11-06T21:28:12.077000Z2015-11-06T20:24:44ZPaulo Gustavo Grahl, CFA<div><b>Main takeaways:</b></div><ul><li>Global PMI continues ticked up in both developed and emerging countries.</li><li>But there is a clear divergence on what the PMIs suggest: </li><li style="list-style: none; display: inline"><ul><li>Developed countries industrial production growth likely to move sideways at a low pace of growth</li><li>Emerging countries IP growth likely to slowdown further.</li></ul></li></ul><div><hr/></div>
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<div>Global PMI ticked up in October...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/c60dd46c-9b41-404c-814d-15716a0d396f.png" style="height: auto;"/></div>
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<div>... and it was an across the board increase; but emerging markets continue to under-perform its developed peers.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/e69f2b40-8f88-43ec-a0d1-e10fd422f9a4.png" style="height: auto;"/></div>
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<div>This suggests industrial production in developed economies should continue to grow at just above 1%...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/2dd47812-9a69-4f6f-8b08-c9fea446f073.png" style="height: auto;"/></div>
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<div>...while industrial production growth in EM economies should slowdown further in the coming months. </div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/897f5c1a-6ced-4b56-92fb-c6bc0d5af961.png" style="height: auto;"/></div>
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<div>And within emerging countries, the slowdown in industrial activity is driven by Asia (China), but it rebounded a bit in October.</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/48feb9ea-d9cc-443d-83ef-3d91586b1165.png" style="height: auto;"/></div>
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<div>The EM and DM PMIs suggest a convergence of growth between the regions is likely to continue...</div>
<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/88aea557-3c8f-412d-b349-6e48e2a80294.png" style="height: auto;"/></div>
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<div>... and as a result global industrial production growth is likely to slowdown. The chart below shows that world industrial production is usually cyclical -- except in the unusual expansion period between Dec/2001 and Feb/2008 and in the last 4 years up to mid-2014. </div>
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<div>The previous slowdown / contraction periods (Dec/94 to Dec/95, Oct/97 to Oct/98, Aug/2000 to Dec/01, Feb/08 to Mar/09) were all period of crisis (Mexico, Asia, Nasdaq, and the GFR) and lasted about one year. The current slowdown is shallower but is also about one year old.</div>
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<div><img src="https://cdn-images.postach.io/1874eebe-7795-46c5-a3ed-075cd1d116e7/9fdd9743-9e0f-4ae6-964c-4d256b221b66/b871af81-2b8f-4c53-8957-00c0fd945af4.png" style="height: auto;"/></div>
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