Where next for US house prices?

Yesterday brought us up to date in the state of play in the US housing market. So without further ado let us take a look.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.2% annual gain in September, up from 3.1% in the previous month. The 10-City Composite annual increase came in at 1.5%, no change from the previous month. The 20-City Composite posted a 2.1% year-over-year gain, up from 2.0% in the previous month.

The first impression is that by the standards we have got used to that is a low number providing us with another context for the interest-rate cuts we have seen in 2019 from the US Federal Reserve. Of course it is not only the Fed that likes higher asset prices.

“DOW, NASDAQ, S&P 500 CLOSE AT RECORD HIGHS”

Another new Stock Market Record. Enjoy!

Those are 2 separate tweets from Monday from President Trump who not only loves a stock market rally but enjoys claiming it is all down to him. I do not recall him specifically noting house prices but it seems in the same asset price pumping spirit to me.

In my opinion the crucial part of the analysis provided by S&P comes right at the beginning.

After a long period of decelerating price increases, it’s notable that in September both the national and
20-city composite indices rose at a higher rate than in August, while the 10-city index’s September rise
matched its August performance. It is, of course, too soon to say whether this month marks an end to
the deceleration or is merely a pause in the longer-term trend.

If we look at the situation we see that things are very different from the 10% per annum rate reached in 2014 and indeed the 7% per annum seen in the early part of last year.That will concern the Fed which went to an extreme amount of effort to get house prices rising again. From a peak of 184.62 in July of 2006 the national index fell to 134.62 in February of 2012 and has now rallied to 212.2 or 58% up from the low and 15% up from the previous peak.

As ever there are regional differences.

Phoenix, Charlotte and Tampa reported the highest year-over-year gains among the 20 cities. In
September, Phoenix led the way with a 6.0% year-over-year price increase, followed by Charlotte with
a 4.6% increase and Tampa with a 4.5% increase. Ten of the 20 cities reported greater price increases
in the year ending September 2019 versus the year ending August 2019…….. Of the 20 cities in the composite, only one (San Francisco) saw a year-over-year price
decline in September

Mortgage Rates

If we look for an influence here we see a contributor to the end of the 7% per annum house price rise in 2018 as they rose back then. But since then things have been rather different as those who have followed my updates on the US bond market will be expecting. Indeed Mortgage News Daily put it like this.

2019 has been the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections……Fed policy and the US/China trade war have been key players.

But we see that so far a move that began in bond markets around last November has yet to have a major influence on house prices. If you wish to know what US house buyers are paying for a mortgage here is the state of play.

Today’s Most Prevalent Rates For Top Tier Scenarios

  • 30YR FIXED -3.75%
  • FHA/VA – 3.375%
  • 15 YEAR FIXED – 3.375%
  • 5 YEAR ARMS –  3.25-3.75% depending on the lender

More recently bonds seem to be rallying again so we may see another dip in mortgage rates but we will have to see and with Thanksgiving Day on the horizon things may be well be quiet for the rest of this week.

The economy

This has been less helpful for house prices.There may be a minor revision later but as we stand the third quarter did this.

Real gross domestic product (GDP) increased 1.9 percent in the third quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( US BEA ).

Each quarter in 2019 has seen lower growth and that trend seems set to continue.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases increased the nowcast for 2019:Q4 by 0.3 percentage point.

Positive surprises from housing data drove most of the increase.

Something of a mixture there as the number rallied due to housing data from building permits and housing starts.Mind you more supply into the same demand could push future prices lower! But returning to the wider economy back in late September the NY Fed was expecting economic growth in line with the previous 5 months of around 2% in annualised terms.But now even with a rally it is a mere 0.7%.

Employment and Wages

The situation here has continued to improve.

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little
changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in
food services and drinking places, social assistance, and financial activities……..In October, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $28.18. Over the past 12 months, average hourly earnings have increased by 3.0 percent.

But the real issue here is the last number. Yes the US has wage gains and they are real wage gains with CPI being as shown below in October.

Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

So this should be helping although it is a slow burner at just over 1% per annum and of course we are reminded that according to the Ivory Towers the employment situation should mean that wage growth is a fair bit higher and certainly over 4% per annum.

Moving back to looking at house prices then wage growth is pretty much the same so houses are not getting more affordable on this criteria.

Comment

As we review the situation it is hard not to laugh at this from Federal Reserve Chair Jerome Powell on Monday.

While events of the year have not much changed the outlook,

You can take this one of two ways.Firstly his interest-rate cuts are not especially relevant or you can wonder why he did them? Looking at the trend for GDP growth does few favours to his statement nor for this bit.

Fortunately, the outlook for further progress is good

Indeed he seemed to keep contradicting himself.

 The preview indicated that job gains over that period were about half a million lower than previously reported. On a monthly basis, job gains were likely about 170,000 per month, rather than 210,000.

But I do note that house prices did get an implicit reference.

But the wealth of middle-income families—savings, home equity, and other assets—has only recently surpassed levels seen before the Great Recession, and the wealth of people with lower incomes, while growing, has yet to fully recover.

As to other signals we get told pretty much every day that the trade war is fixed so there is not a little fatigue and ennui on this subject. Looking at the money supply then it should be supportive but the most recent number for narrow money M1 at 6.8% shows a bit of fading too.

So whilst we may see a boost for the economy from around the spring of next year we seem set for more of the same for house prices.Unless of course the US Federal Reserve has to act again which with the ongoing Repo numbers is a possibility. The background is this though which brings me back to why central bankers are so keen on keeping on keeping house prices out of consumer inflation measures.Can you guess which of the lines below goes into the official CPI?

https://www.bourbonfm.com/blog/house-price-index-vs-owners-equivalent-rent-residences-1990

Whilst it is not sadly up to date it does establish a principle….

 

 

Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.

Why?

If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?

Banks

As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.

Comment

It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?

 

 

 

 

UK employment trends will worry the Bank of England

Today moves us on from the output situation of the UK economy to the employment and wages situation. On the latter we have already received some good news this week. From the BBC.

Thousands of UK workers will enjoy a pre-Christmas pay bump if their employer is a member of the “real living wage” campaign.

Businesses who have signed up to the voluntary scheme will lift their UK hourly rate by 30p to £9.30.

People living in London will see their hourly pay rise by 20p to £10.75.

The scheme is separate to the statutory National Living Wage for workers aged 25 and above which currently stands at £8.21 an hour.

The Living Wage Foundation said its “real” pay rate – which applies to all employees over 18 – is calculated independently and is based on costs such as food, clothing and household bills.

If we look at the wider pay picture we see from the Bank of England that it has been really rather good.

Pay growth has increased steadily over the past few years as the labour market has tightened. Private sector regular
pay growth was 4.0% in the three months to August, as high as it has been in over a decade. The
strength in pay growth has been broadly based, with growth picking up in both the private and public sectors in recent years.

I am not so sure about their “increased steadily” as they have been like the boy ( and occasional girl) who cried wolf on this subject. But we have seen a better phase and it is this that has been a major factor in keeping us away from recession and seeing some economic growth. The fear looking ahead is that it may fade.

A number of indicators suggest that pay pressures are no longer building, and pay growth may cool over the coming
months . The Bank’s settlements database suggests pay awards are clustering between 2% and 3%, slightly
lower than a year ago. Surveys by the REC and the Bank’s Agents also suggest pay growth is stabilising a little below
the pace of growth in the official data.

This may not be as bad for real pay growth as you might think because there are grounds for thinking inflation will decline. The rally in the UK Pound £ will help bring it lower and I note that having improved against the Euro to over 1.16 we should head towards the inflation rate there.

Euro area annual inflation is expected to be 0.7% in October 2019, down from 0.8% in September according to a
flash estimate from Eurostat, the statistical office of the European Union.

Today’s Data

If we start with the wages data then maybe the Bank of England has been right for once. It does not happen often so let’s give them a little credit.

In the year to September 2019, nominal total pay (which includes bonus payments) grew by 3.6% to reach £542 per week. Over the same period, nominal regular pay (which excludes bonus payments) grew by 3.6% to reach £508 per week.

The nuance to this is that it was not so long ago we would be quite happy with this and there were suspicions that the numbers had been boosted by the timing of NHS settlements. The official view on the impact of this is shown below.

Total and regular pay can be expressed in real terms when they have been deflated. We deflate them using the Consumer Prices Index including owner occupiers’ housing costs (CPIH) (2015=100). After adjustment, real total pay increased by 1.8% over the year to £502 in September 2019. Real regular pay increased by 1.7% over the year to £470.

I am pleased they have switched to “we deflate them” which at least gives some sort of hint of the woeful inflation measure they use as it is driven ( 17%) by imputed rents. As it happens because house price growth has fallen back it is not as wrong as usual but is still an over estimate of real wage growth in my opinion.

There was a counter current in the detail because September wage growth at 3.6% was better than the 3.4% of August. The sector pulling it higher was construction at 6%.

A Wages Depression?

If we move to the bigger picture then even using such a flattering and favourable view of inflation cannot escape this reality.

real regular pay was £3 (or 0.63%) lower than the pre-downturn peak of reached in the three months to April 2008 (£473). The real total pay value of £502 in September was £23 (or 4.38%) lower than the peak reached in the three months to February 2008 (£525).

In spite of the recovery we have seen in other areas particularly output and employment those numbers are a stark reminder that the credit crunch era has brought ch-ch-changes. Even at the current rate of real wage growth it will be more than a couple of years before we do a Maxine Nightingale and get right back where we started from.

Employment

The Resolution Foundation have summed it up here.

it’s clear that there is no bigger change to our economy over this period than the employment boom. Over 3 million more people are in work and the working-age employment rate is around 3 percentage points higher than when we were last broadly at full employment in 2008.

They however find themselves in some theoretical quicksand highlighted by their use of “full employment” when it was a fair bit lower than now and the use of “broadly” does not cut it. They are in the same quicksand with wages as higher labour supply has apparently kept it low and yet in the past we recall being told that higher migration ( higher labour supply) did not affect wage growth.

But the picture here has been like the “Boom! Boom! Boom!” of the Black-Eyed Peas as we note that now the winds of change might be blowing.

The latest UK Labour Force Survey (LFS) estimates for Quarter 3 (July to Sept) 2019 saw employment decline by 58,000 to 32.75 million, the second rolling quarterly decrease. However, in the year to September 2019, employment increased by 323,000.

This is consistent with a slowing economy and high levels of employment. We will have to see if the numbers will ebb and flow or have now turned lower. Also the mixture has changed as recent years have been a case of let’s hear it for the girls.

The fall in employment in Quarter 3 was driven by the fall in the number of women in employment, down by 93,000 to 15.46 million. Over the same period, the number of employed men increased by 35,000 to 17.3 million.

Comment

Let me now switch to the best part of today’s report which is this.

The level of unemployment fell by 23,000 to 1.31 million in Quarter 3 2019, while the unemployment rate fell by 0.1 percentage point to 3.8%. Compared with Quarter 3 2018, the level of unemployment decreased by 72,000.

For newer readers unemployment and employment can both rise or as they have in this instance fall. It seems illogical but there is also an inactive category, but the specific move at this time of year is probably related to students.

The mixed picture we have today of slowing wage growth with employment falling will be noted at the Bank of England. Already 2 have voted for an interest-rate cut and more much of these will see that number rise. Of course the Bank of England is in quite a mess as Samuel Tombs of Pantheon inadvertently pointed out.

And at 3.8%, the u/e rate is well below the MPC’s estimate of its sustainable level, 4.25%.

So wage growth should be rising. Oh well! Also that is before we get to them thinking it was 4.5%, 5%, 5.5% and 6.5%. So they do not know what they are doing which usually in their case means another interest-rate cut is in the offing.

That would be curious as we are in a phase where bond yields generally have been backing up. The UK 5 and 2 year yields have risen in response to 0.55%, who said markets were always right? Or indeed always logical?

 

 

 

 

 

Good news for the UK economy on the wages and broad money front less so on consumer credit

Today I feel sorry for whoever has to explain this at the Bank of England morning meeting.

“Annual house price growth remained below 1% for the 11th
month in a row in October, at 0.4%. Average prices rose by
around £800 over the last 12 months, a significant slowing
compared with recent years – for example, in the same
period to October 2016, prices increased by £9,100.”

That was from the Nationwide Building Society which has brought news to spoil a central banker’s breakfast. After all they have done their best.

“Moreover, mortgage rates remain close to all-time lows –
more than 95% of borrowers have opted for fixed rate deals
in recent quarters, around half of which have opted to fix for five years.”

The irony here is that they have made their own Bank Rate changes pretty impotent. I recall in the early days of this decade noting that nearly all mortgages in Portugal were fixed-rate ones and thinking we were different. Well not any more!

But unlike Governor Carney I consider this to be a good news story because of this bit.

the unemployment rate remains close to 40 year lows and real earnings growth (i.e. after taking account of inflation) is close to levels prevailing before the financial crisis.

So houses are becoming more affordable in general terms and the Nationwide is beginning to pick this up as its earnings to house price ratio has fallen from 5.2 to 5. Although the falls are concentrated in London ( from 10 to 8.9) and the outer London area ( 7.2 to 6.7). Both Northern Ireland ( now 4) and the West Midlands ( now 4.7) have seen small rises.

UK Wages

We can look at the wages position in more detail because this morning has brought the results of the annual ASHE survey.

Median weekly earnings for full-time employees reached £585 in April 2019, an increase of 2.9% since April 2018….In real terms (after adjusting for inflation), median full-time employee earnings increased by 0.9% in the year to April 2019.

So we see something of a turning in the situation for the better although sadly the situation for real wages is not that good, as it relies on the Imputed Rent driven CPIH measure of inflation. So maybe we had 0.5% growth in real wages.

Even using the fantasy driven inflation measure we are still worse off than we once were.

Median weekly earnings in real terms are still 2.9% lower (£18 lower) than the peak in 2008 of £603 in 2019 prices.

These numbers conceal wide regional variations as highlighted here.

In April 2019, the City of London had the highest gross weekly earnings for full-time employees (£1,052) and Newark and Sherwood had the lowest (£431).

Also the way to get a pay rise was to change jobs.

In 2019, the difference in growth in earnings for full-time employees who changed jobs since April 2018 (8.0%) compared with those who stayed in the same job (1.6%) was high, suggesting stronger upward pressure on wages compared with other years.

Tucked away in the detail was some good news for part-time workers.

Median weekly earnings for part-time jobs increased at a greater rate. In 2019, earnings increased by 5.2% in nominal terms, which translates to a 3.1% increase in real terms. The median weekly earnings for part-time employee jobs of £197 is 6.5% higher than in 2008 in real terms.

It seems that the changes in the national minimum wage have had a positive impact here.

Meanwhile far from everyone has seen a rise.

The proportion of employees experiencing a pay freeze or a decrease in earnings (in real terms) in 2019 (35.7%) is lower than in 2018 (43.3%) and in 2011 (relative to 2010) when it was 60.5%.

Mortgages

From the Bank of England today.

Mortgage market indicators point to continued stability in the market. Net mortgage borrowing by households was little changed at £3.8 billion in September. The stability in the monthly flows has left the annual growth rate unchanged at 3.2%. Growth rates have now remained close to this figure for the past three years. Mortgage approvals for house purchase (an indicator for future lending) were also broadly unchanged in September, at 66,000, and remained within the narrow range seen over the past three years.

As you can see this was a case of what Talking Heads would call.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

Although there is a nuance in that the longer-term objective of the Bank of England is still in play. The true purpose of the Funding for Lending Scheme of the summer of 2012 was to get net mortgage credit consistently positive. That was achieved as there have been no monthly declines since ( unlike in 2010 and 2011) and over time the amount has risen. Nothing like the £9 billion pluses of 2007 but much higher than post credit crunch.

Consumer Credit

The credit impulse provided by the Funding for Lending Scheme was always likely to leak into here.

The annual growth rate of consumer credit was 6.0% in September. This growth rate has now been falling steadily for nearly three years. Revisions to the data this month, however, mean that the annual growth rate has been revised up slightly over the past two and a half years.

Let me give you an example of how the rate of consumer credit growth has been falling from last month’s update.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%.

The “revised up slightly” means it is now being reported as 6.1%. This is really poor as we can all make mistakes but this is a big deal and needs a full explanation as something has gone wrong enough on a scale to change the narrative.

Assuming this number is correct here is the detail for September itself.

The extra amount borrowed by consumers in order to buy goods and services fell slightly to £0.8 billion in September, and for the second month in a row was below £1.1 billion, the average since July 2018.

Broad Money

There was some good news in this release for the UK economy.

Total money holdings in September rose by £10.9 billion, broadly flat on the month, and remaining above the average of the past 6 months.

The amount of money held by households rose by £5.5 billion in September, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings rose by £4.3 billion, while the amount held by PNFCs rose by £1.0 billion.

I am a little unclear how a rise of just under £11 billion is “broadly flat”! But anyway this continues the improvement in the annual growth rate to 3.9% as opposed to the 1.8% of both January and May. Individual months can be erratic but we seem to have turned higher as a trend.

Comment

There have been several bits of good news for the UK economy today. The first is the confirmation of the improvement in the trajectory for real wages and some rather good growth for those working part-time. This feeds into the next bit which is the way that houses and flats are slowly becoming more affordable albeit that much of the progress has been in London and its environs. Looking ahead we see that the improvement in broad money growth is hopeful for the early part of 2021.

The higher trajectory for consumer credit growth is mixed,however. Whilst it will have provided a boost it is back to the age old UK economic problem of borrowing on credit and then wondering about the trade gap. It is especially poor that the Bank of England has been unable to count the numbers correctly. Also it is time for my regular reminder that the credit easing policies were supposed to boost lending to smaller businesses. How is that going?

while the growth rate of borrowing by SMEs rose slightly to 1.0%.

Woeful and a clear misrepresentation of what they were really up to.

NB

I later discovered that the Bank of England revised Consumer Credit higher by some £6.1 billion in August meaning that as of the end of September it was £225.1 billion.

 

 

 

UK Retail Sales are strong again posing questions for the CBI and BRC

We find ourselves advancing today on what is the strengths of the UK economy which is retail sales. These have consistently supported economic output and GDP ( Gross Domestic Product). However there is an undercut to this as our propensity to consume is a major factor in our persistent balance of trade deficits. It is also one of the factors that gets forgotten when this tune starts up and people get the vapors because it is an area where we are different.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

British Retail Consortium

This has played a rather different tune to the official data as these excerpts from its prices report show.

Shop prices fell by 0.6% on the previous year as low consumer demand and stiff competition continued to push down prices…….While consumers may welcome lower prices, falling consumer demand is squeezing retailers’ already tight margins.

Their volume data has been weak for some time.

Unsurprisingly September proved to be another difficult month for retailers, with like-for-like sales declining by 1.7 per cent compared to last year. Worryingly, even online sales moved closer to stalling, with growth of non-food online sales only 0.7 per cent.

“Ongoing Brexit uncertainty is clearly having a material impact on the consumer psyche, with all but one non-food category being in decline in September. Consumers are choosing to focus on the essentials, with food one of the few categories delivering growth.

The trouble is that they have ended up looking like they have experienced a set of bum notes as the official data has turned out to be pretty good. Indeed frankly there has been no relation between the two at all.

The CBI

The Confederation of British Industry has been sending out an SOS for some time now.

Retail sales volumes in the year to September fell for the fifth consecutive month, albeit at a slower pace than the previous month, according to the latest CBI Distributive Trades Survey. Retailers expect the contraction in sales volumes to ease further in October.

There is a particular subject they seem obsessed with.

Five successive months of falling volumes tells its own story about the tough conditions retailers are having to operate in. Add to this the pressures of Sterling depreciation and the need to plan for potential tariffs and supply issues in the event of a no-deal Brexit and you get a gloomy picture for the sector.

The media have often joined in with this gloomy view but have regularly found themselves crossing their fingers that their readers,listeners and viewers have forgotten this when the official data is released. I fear that the British Retail Consortium and the CBI are imposing their own views on a particular issue onto the data rather than just letting the numbers speak for themselves.

Today’s Data

At first it might appear odd that this was a good number.

The quantity bought was flat (0.0%) in September 2019 when compared with the previous month, following a fall of 0.3% in August 2019.

There is the improvement from last month’s fall but there is also the fact that September last year was a particularly weak number where the index fell from 106.2 to 105.4 so if we switch to an annual comparison we see a strengthening of the position.

The year-on-year growth rate shows that the quantity bought in September 2019 increased by 3.1%, with growth across all sectors except department stores and household goods.

If we look at the picture we see that pretty much everywhere is strong but particularly non-retail and food.

In September 2019, all four main sectors contributed positively to the amount spent and quantity bought, resulting in a year-on-year growth of 3.4 and 3.1 percentage points respectively.

Non-store retailing provided the largest contribution to the growth in the quantity bought at 1.4 percentage points. Food stores reported the largest contribution to the amount spent at 1.5 percentage points in September 2019.

The Recent Trend

There have always been issues with monthly retail sales data being erratic and the modern era with the development of Black Friday and Amazon sales days have made that worse. Thus we get the best idea from the three month average.

In the three months to September 2019, moderate growth in the quantity bought continued at 0.6% when compared with the previous three months, with all sectors within non-food stores reporting declines except “other stores”.

That may be moderate growth for retail sales but we would be happy indeed if all the other areas of the economy managed it! As to the detail we are told this.

Non-store retailing showed strong growth at 4.3%; this includes a strong monthly growth in July 2019 of 6.9% with summer promotions boosting sales more than usual in this month. Food stores also reported a growth in the three-month on three-month movement; this follows three previous months of decline in the three-month on three-month growth rate.

I am afraid that one sector seems locked into decline though.

Department stores continued the ongoing decline in the three-month on three-month movement resulting in 13 consecutive months of no growth in this sector.

Online Sales

These continue to strengthen overall.

Internet sales increased by 9.1% for the amount spent in September 2019 when compared with September 2018, with all sectors reporting growths except department stores.

However the monthly numbers like elsewhere are erratic.

In contrast, internet sales fell on the month by 2.0% when compared with August 2019.

It seems that department stores cannot buy a break as I note that their online sales over the past year have fallen by 3.6%

Comment

We are seeing yet more confirmation of the theme that I established on the 29th of January 2015.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

Actually we have shifted from absolute price falls to relative ones as inflation in this area which has been around 0.3% is far lower than wage growth, So we have real wage growth of over 3% which is boosting retail sales. Ironically the British Retail Consortium think this impact may be even stronger.

September Shop Prices fell by 0.6% compared to a 0.4% decrease in August. This is the highest rate of decline since May 2018…..Non-Food prices fell by 1.7% in September compared to August’s decrease of 1.5%. It is the highest rate of decline since May 2018.

So according to their numbers relative real wages are surging but as to the consequences well Kim Syms got it right I think.

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing.

As to the wider issue these numbers move the UK further away from a recession as they suggest a small ( 0.03%) boost on a quarterly basis and a stronger annual one.

Meanwhile in other news Bank of England Governor Mark Carney has flown all the way to Boston in the United States to lecture us all on climate change.

Asked about his views on climate change and potential divestments from fossil fuel firms, Carney said a more effective approach would be to help companies, including automakers and energy producers, move to lower emissions.

“It’s not just about divestment,” he said. Better, he said, would be “to put capital into an energy company, that’s going from oil-and-coal heavy to a renewable mix, that they wouldn’t otherwise do if they didn’t get the capital.” ( Reuters)

He did however find time to remind us that his priority remains The Precious! The Precious!

Carney said the British central bank would probably cut the countercyclical capital buffer that it sets for banks to zero, from 1% now, if the economy – which faces the prospect of a no-deal Brexit shock – took a hit.

The Investing Channel

 

 

UK wages growth, employment and unemployment all weaken in a worrying sign

Today merges several of our themes as a rather packed diary sees Bank of England Governor Mark Carney give evidence to Parliament just as the latest employment and wages data are released. There are various matters which make have him breaking out in a cold sweat. One is the rally in the UK Pound £ to US $1.266 which even he may be able to talk down. The next is the rise in annual wage growth above 4% which in the past has been regarded as something of a threshold for considering interest-rate increases. Of course that is likely to go the way that the 7% unemployment rate did! That of course raises the next issue of how the unemployment rate has fallen below 4% being chased by an equilibrium unemployment rate which is apparently now 4.25%.

It was only yesterday that I pointed out that Dave ( Sir David to his friends) Ramsden of the Bank of England was still churning out the failed Ivory Tower output gap methodology.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth,

Also tucked away in a really dull speech about longer-term trends Sir Jon Cunliffe made the case for more policy activism.

But, taken together with other changes in the economy – such as changes in the labour market which appear to have led to some flattening of the wage Phillips curve and
changes in the pass-through of labour costs to consumer prices – the probability is that demand management will need to use more tools to stimulate demand in downturns and work harder to prevent macro-economic tail events.

My apologies for their Phillips Curve obsession, but you see he is trying to tell us lower interest-rates are really nothing to do with him and his colleagues and then ask for even more freedom to interfere in the economy! He continues on that path here and “can be overdone” is classic civil service speak where is he taking out a bit of an each-way bet for himself ( but not us).

There is a lively debate over the extent to which aggressive use of monetary policy tools to stimulate demand creates financial stability risks by inflating asset prices and encouraging risk taking and the build-up of debt. My own view is that this can be overdone. There are, as I have said, deep-seated underlying structural drivers of low for long.

Perhaps he learnt all this stuff during his time at HM Treasury ( 1990-2007) which seems to have undertaken a reverse takeover of the Bank of England.

Wages

Today has brought some news that the recent past was not quite as good as we thought it was . Last month we were told that average earnings growth in July was 4.2% but this morning that has been cut to 3.9% which ch-ch-changes the picture somewhat. So now let us peruse this month’s data.

Estimated annual growth in average weekly earnings for employees in Great Britain was 3.8% for both total pay (including bonuses) and regular pay (excluding bonuses).

This means that the Bank of England can let loose a sigh of relief as the 4% wages growth threshold was not in fact in play as we only made 3.9% and have now dipped back to 3.8%. In terms of a pattern we see that since October last week each month with only one exception has seen annual wages growth above 3% so we have moved to a new higher path. Of which August at 3.6% is consistent with that and the detail backs this up.

All sectors except manufacturing saw annual pay growth of at least 3.0%; construction saw the highest estimated growth of over 5.5% for both total pay and regular pay…..manufacturing saw the lowest growth, estimated at 2.7% for total pay and 2.5% for regular pay.

So the numbers are good but not as good as we were previously told and maybe this was a factor.

Public sector pay growth has fallen back below that for the private sector, following higher growth in March to May 2019, impacted by the effect of a different pattern of pay rises for some NHS staff in 2019 compared with 2018.

Real Wages

According to the official rhetoric the position is now rather good.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.9% and annual growth in regular pay is estimated to be 2.0%.

As nominal pay growth is the same I am not sure how they get to that! Let us hope there is a difference at the second decimal place. But the fundamental issue is that it requires the use of the fantasy imputed rent driven CPIH inflation measure to get numbers that high. If we use RPI it drops back to more like 1%.

Also even using it we remain in a depression for real wage growth.

The equivalent figures for total pay in real terms are £502 per week in August 2019 and £525 in February 2008, a 4.4% difference.

Employment

The situation here has been good for seven years or so but this morning indicated the first signs of a wobble.

The UK employment rate was estimated at 75.9%; higher than a year earlier (75.6%) but 0.2 percentage points lower than last quarter……the estimated employment rate for women was 71.6%; this is 0.6 percentage points up on the year, but 0.3 percentage points down on the quarter

I added the detail on women because the change was them. Does anybody have any thoughts as to why this might be so?

We get some more detail from this.

Estimates for June to August 2019 show 32.69 million people aged 16 years and over in employment, 282,000 more than a year earlier. This annual increase was mainly driven by women (up 202,000 on the year), those aged 50 years and over (up 287,000 on the year) and full-time workers (up 263,000 on the year). There was, however, a 56,000 decrease in employment on the quarter, which was the first quarterly decrease since August to October 2017.

Furthermore we seem to be switching towards self-employment again.

However, the latest estimate shows the weakest annual increase for employees since May to July 2012 (see Figure 3), making it smaller than the annual increase for the self-employed.

Unemployment

This has been in a long downtrend but again we saw a change today.

The UK unemployment rate was estimated at 3.9%; this is lower than a year earlier (4.0%) but 0.1 percentage points higher than last quarter…….the level of unemployment increasing by 22,000 to 1.31 million, in the three months to August 2019.

Yet rather oddly considering the pattern of the employment data above it was men that were made unemployed.

the estimated UK unemployment rate for men was 4.0%, 0.1 percentage points lower than last year but 0.1 percentage points higher than the previous quarter……..the estimated UK unemployment rate for women was 3.7%, down 0.3 percentage points on a year earlier but largely unchanged on the quarter.

Comment

This is the first real hint of a possible sea change in the UK labour market which has just seen something of a troika of news. Wage growth is slower than we thought combined with weaker employment and higher unemployment. We still have much better wage growth and the employment levels are very high but if we were the Star ship Enterprise the Captain would be considering pressing the yellow alert button.

The changes in the wages data remind us of the caution that is requited with even official data. Let me remind you that the self-employed and the armed forces are ignored and that companies below 20 people are mostly imputed.

Returning to the Bank of England then they will be thinking of another interest-rate cut whilst Governor Carney emits gens like this.

“The pound is either going to move up or down,” says Mark Carney ( @BruceReuters)

Also he has been contradicting past Bank of England research.

BANK OF ENGLAND’S CARNEY SAYS UK INCOME AND WEALTH INEQUALITY FELL OVER THE PERIOD BOE QUANTITATIVE EASING WAS ACTIVE ( @RedboxGlobal )

 

 

 

 

What next in terms of interest-rates from the Bank of England?

There is much to engage the Bank of England at this time. There is the pretty much world wide manufacturing recession that affected the UK as shown below in the latest data.

The three-monthly fall in manufacturing of 1.1% is because of widespread weakness with 11 of the 13 subsectors decreasing; this was led by food, beverages and tobacco (2.0%) and computer, electronic and optical products (3.5%).

The recent declines have in fact reminded us that if all the monetary easing was for manufacturing it has not worked because it was at 105.1 at the previous peak in February 2018 ( 2015 = 100) as opposed to 101.4 this August if we look at a rolling three monthly measure. Or to put it another way we have seen a long-lasting depression just deepen again.

Also at the end of last week there was quite a bounce back by the value of the UK Pound £. Much of that has remained so far this morning as we are at 1.142 versus the Euro. Unfortunately the Bank of England has been somewhat tardy in updating its effective exchange rate index but using its old rule of thumb I estimate that the move was equivalent to a 0.75% rise in interest-rates. Actually there was another influence as the Gilt market fell at the same time with the ten-year yield rising to 0.7% on Friday.

Enter Dave Ramsden

I note that Sir David Ramsden CBE is now Dave but more important for me is the way that like all Deputy Governors these days he is a HM Treasury alumni.

Before joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017.

On a conceptual level there seems little point in making the Bank of England independent from the Treasury and then filling it with Treasury insiders. So the word independent needs to be in my financial lexicon for these times.

However Dave is in the news because he has been interviewed by the Daily Telegraph. So let us examine what he has said.

The UK’s “speed limit” for growth has been so damaged by uncertainty over Brexit that it could hamper the Bank of England’s ability to help a weak economy with lower interest rates, deputy Governor Sir Dave Ramsden warned today.

There are several issues raised already. For example the “speed limit” follows quite a few failures for the Bank of England Ivory Tower, There was the output gap failure and the Phillips Curve but all pale into insignificance compared to the unemployment rate where 4.25% is the new 7%. As to the “speed limit” of 1.5% for GDP growth then as we were at 1.3% at the end of the second quarter in spite of the quarterly decline of 0.2% seen Dave seems to be whistling in the wind a bit.

Also the issue of the Bank of England helping the economy with lower interest-rates has two issues. The first is that interest-rates were slashed but we are where we are. Next the responsibility for Bank Rate being at 0.75% is of course with Dave and his colleagues. That is also inconsistent with the claims of Governor Mark Carney that the 0.25% interest-rate cut and Sledgehammer QE of August 2016 saved 250,000 jobs.

Productivity

Dave’s main concern was this.

He said he was more cautious over the economy’s growth potential thanks to consistent disappointments on productivity, which sank at its fastest pace for five years in the three months to June.

For those who have not seen the official data here it is.

Labour productivity, as measured on an output per hour basis, fell by 0.5% compared with Quarter 2 (Apr to June) 2018. This follows two consecutive quarters of zero growth.

The problem with this type of thinking is that it ignores the switch to services which has been taking place for decades as they are areas where productivity is often hard to measure and sometimes you would not want at all. After my knee operation I had some 30 minute physio sessions and would not have been pleased if I was paying the same amount for twenty minutes!

Next comes the issue of the present contraction in manufacturing which will be making productivity worse. This is before we get to the issue that some of the claimed productivity gains pre credit crunch were an illusion as the banking sector inflated rather than grew.

Wages

Dave does not seem to be especially keen on the improvement in wage growth that has seen it rise to an annual rate of above 4%.

The critical economic ingredient has lagged since the crisis as businesses cut back investment spending, dampening the UK’s ability to produce more, fund sustainable pay rises and be internationally competitive. Company wage costs “are picking up quite significantly, which will drive domestic inflationary pressure”, he added.

Not much fun there for those whose real wages are still below the previous peak.We get dome further thoughts via the usual buzz phrase bingo central bankers so love.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth, because I think supply potential, the speed limit of the economy, is also slowing through this period. That comes through for me pretty clearly in the latest productivity numbers.

News of the Ivory Tower theoretical conceptual failure does not seem to have arrived at Dave’s door.

Policy Prescription

In a world of “entrenched uncertainty” – a likely temporary extension to the UK’s membership if the Prime Minister complies with the Benn Act – “I see less of a case for a more accommodative monetary position,” Sir Dave said.

Also taking him away from an interest-rate cut was this.

Sir Dave – who refused to comment on whether he had applied to replace outgoing Governor Mark Carney – said the MPC would also have to take account of the recent £13.4bn surge in public spending unveiled by Chancellor Sajid Javid in last month’s spending review. The Bank estimates that will add 0.4 percentage point to growth.

Comment

In the past Dave has tried to make it look as though he is an expert in financial markets perhaps in an attempt to justify his role as Deputy Governor for that area. Unfortunately for him that has gone rather awry. If he looked at the rise in the UK ten-year Gilt yield form 0.45% to 0.71% at the end of last week or the three point fall in the Gilt future Fave may have thought that his speech would be well timed. Sadly for him that has gone all wrong this morning as the Gilt market has U-Turned and as the Gilt future has rallied a point the ten-year yield has fallen to 0.62%

So it would appear he may even have negative credibility in the markets. Perhaps they have picked up on the tendency of Bank of England policymakers to vote in a “I agree with Mark ( Carney)” fashion. His credibility took quite a knock back in May 2016 when he described consumer credit growth of 8.6% like this.

Bank Of England’s Ramsden Says Weak Consumer Credit Data Was Another Factor That Made Me Fear UK Consumption Growth Could Slow Further, Need To Wait And See ( @LiveSquawk )

In terms of PR though should Sir Dave vote for an interest-rate cut he can present it as something he did not want to do. After all so much central banking policy making comes down to PR these days.

Podcast