Charts of the Week

US household assets boomed and busted in the last recession

The pandemic had many surprising effects on the economy. For example, many American families became much richer. That wealth effect is now being unwound.

The following chart displays the evolution of US households’ financial assets three years before and three years after the beginning of various recessions (that’s the “0” in the middle of the x axis).

One look will tell you that the Covid-19 shock was an extreme outlier. Thanks to unprecedented fiscal and monetary stimulus, stock prices and real estate surged. Compare that to the effect of the recession that started in 2007 – the lowest line graphed on our chart.

Now, however, we are seeing a big reversal as the Federal Reserve tightens monetary policy rapidly to bring down inflation. Equities are in a bear market as a result, and the US housing market is under pressure as well.

Financial assets are still more highly priced than they were pre-pandemic. But the current plunge is probably a necessary reversion to the mean. The economics professor Ricardo Caballero argues that it was optimal to use monetary policy to boost asset prices beyond their fundamentals when the economy was in shock and US interest rates could not fall below zero; now, it’s natural for asset prices to retreat while GDP catches up.

The remarkable US labour market

Despite various signs of weakness in the US economy, the labour market is still running quite hot. 

The graph below is a Beveridge curve, which represents the relationship between unemployment and job vacancies. (It slopes downward because higher joblessness is normally combined with fewer jobs available.) 

Our chart tracks the US for various time periods since 2000. The curve for the Covid-19 and post-pandemic period is remarkable for its very high peaks of both unemployment and job vacancies. 

Economists are debating whether the high number of vacancies at the present time accurately reflects the state of the labour market. For a given unemployment rate, a higher level of job openings usually means more structural inefficiencies: the unemployed don’t have the skills to match vacancies, or won’t move geographically to fill them. Over recent decades, the Beveridge curve has shifted outwards after large recessions – potentially implying an ever-growing structural labour market mismatch. 

The Fed is trying to cool the labour market to bring inflation down, but with a soft landing: reducing the number of job vacancies without creating excess unemployment.    

Fewer ships are calling at the Port of Los Angeles

Shipping and port activity is a key indicator for the strength of consumption and the wider economy. Just months ago, the Port of Los Angeles, America’s busiest, was bottlenecked. Rather suddenly, that has changed.

Our chart graphs imports via this key US gateway for every year since 2015, with 2022 highlighted as the darkest line – and plunging over the past two months. Labour negotiations may be partly to blame, but this decline also suggests that the Fed’s monetary tightening is having a significant effect.

The situation is in sharp contrast to import traffic throughout 2021 and the first half of 2022, which was significantly higher than the pre-pandemic norm.

Volatile US rental prices take a long time to filter through into CPI

When it comes to rent increases, the official measure of inflation is saying one thing -- but market prices are telling you another.

The chart below tracks month-on-month changes to US rental prices from Zillow, the real-estate website. We calculated and graphed the median value and percentile bands based on rent indices from 382 metropolitan areas. Then, we overlaid the rental component of the consumer price index.

The result? Surging market rents significantly outpace their CPI equivalent throughout 2021 and early 2022. There’s little doubt that the CPI series is a lagging indicator here, understating actual price increases. 

Today, we see the reverse. The US housing market is cooling, and market rents are plunging at a rapid rate. But the CPI series is still going up!

This time lag is a risk for the Fed, which runs the risk of overshooting as it tightens monetary policy. 

West Coast house prices plunge in unison and more viciously than in 2007

Maybe it’s those high-paying tech jobs, or the natural beauty, or the weather. But the west coast of the US is known for having some of the most expensive housing in the world.

As the Fed hikes rates, cities up and down the Pacific seaboard are now seeing house prices plunge in unison. That’s notable given that house prices are usually quite sticky – only declining substantially during major economic downturns, such as the 2007-2009 crash. 

The following chart tracks the changes to the S&P Case-Shiller Index for San Diego, Los Angeles, San Francisco and Seattle. Even at the start of 2022, these cities were experiencing rapid price appreciation, with monthly rates of change exceeding 3 percent.

The situation has changed rapidly. Home prices are now falling at a month-on-month rate exceeding 2 percent. That’s a more rapid reversal than the pre-financial crisis boom and bust.

The Hang Seng Index keeps slumping

Hong Kong’s stock market is historically a key destination for mainland Chinese investment flows. This year, it has been in the doldrums, wiping out more than a decade of gains.

The following chart tracks the recent performance of the city’s benchmark Hang Seng stock index as well as technical indicators including the Bollinger band and moving average. After this month’s plunge, we are well below the benchmark’s moving average. The Hang Seng is trading at its lowest since 2009.

China’s economic model is being challenged by adverse demographics and a deflating real estate bubble.

The lessons of repeated ECB inflation revisions

The following chart shows how the ECB kept raising its inflation outlook – only to have even that elevated forecast outpaced by reality. This year has dented confidence in central banks’ ability to predict the future. 

On the one hand, it should be emphasized that 2022 saw inflationary shocks that would have been hard for the ECB to anticipate: namely, Russia’s war with Ukraine and China doubling down on its zero-Covid strategy. (Moreover, many private forecasters didn’t do much better.)

On the other hand, the forecasting failures show that many macroeconomic models, especially the ones used by central bankers (namely, the dynamic stochastic general equilibrium model, or DSGE), are seriously flawed. They implicitly assume a strong likelihood that inflation will revert to the mean. That assumption is currently not borne out in reality.

The eurozone inflation heatmap has very few chilly sectors

The following chart is a euro-area heatmap showing the total harmonized index of consumer prices (HICP) as well as many of its subcomponents. 

Inflation is running lukewarm to very hot across many industries. This heatmap would have looked very different just a year ago.

The wild ride and collapse of natural gas prices

After soaring earlier this year, natural gas prices in Europe have come back down with a thud. 

The first chart shows how Dutch gas futures are back below EUR 40 per Mwh -- not that far off the pre-pandemic price.  We’re a long way from the summertime panic, when the war in Ukraine and supply-chain issues sparked fear about wintertime gas shortages. 

Part of the reason for the price collapse is that Europe’s autumn weather has been quite mild. Furthermore, Europe managed to fill up its gas storage sites --  despite lower imports from Russia. As the next chart shows, most national inventory levels are above 90 percent and ahead of European targets.

Liquefied natural gas exported from the US has been crucial. As the chart also shows, LNG storage is way up in Spain (where boats are anchored offshore, waiting for prices to rise before they unload their gas) and to a lesser extent in France, the Netherlands and Italy.

Clocking out another downswing in the EU

The following chart is a “clock” tracking the European Union’s progress through the business cycle, divided into four quadrants: contraction, upswing, expansion, and downswing. The arrows track the overall economy as well as five subsectors.

The data starts in January 2020, and the arrows quickly head downward to contraction as the pandemic gathers pace. Since then, the economic climate indicators have traveled in a full circle around the clock, including upswing and expansion during the economic recovery in late 2020 and 2021. 

As central banks hike rates aggressively, we are already in the downswing and contraction phase again.

Financial stress is more European than American this time

Measures of stress in the financial system are showing that the turmoil of 2022 is playing out quite differently than the global financial crisis of 2008 or the Covid-19 pandemic.

The following chart plots the US stress index from the Federal Reserve Bank of St. Louis against a similar measure that the European Central Bank calculates for the euro region. The weekly data points go back to 1999.

We’ve highlighted the GFC and pandemic periods to show how financial stress was elevated on both sides of the Atlantic during those episodes. During the worst of Covid-19, financial conditions were tighter in Europe than they were in the US. The ECB was also able to keep stress much lower than it did during the European debt crisis a decade earlier.

This time is different. The eurozone is experiencing a broad-based increase in financial stress. But even as the Fed hikes rates rapidly to bring down inflation, financial conditions still seem to be quite loose for the US economy -- at least according to the St. Louis Fed’s metric. This might be fodder for Fed hawks who see room to keep tightening.

Chinese travel slows as we await GDP

China unexpectedly delayed the release of its gross domestic product figures, a move that is unlikely to reassure markets concerned about the nation’s sharp economic slowdown and the consequences of its zero-Covid strategy. A new release date has yet to be scheduled. 

While we await the GDP figure, we can contemplate alternative data sets that may give an idea of how lockdowns are affecting economic activity.

The following charts track plummeting road and public-transit mobility data related to the city of Zhengzhou, the capital of Henan province. The metropolis is a manufacturing hub for the iPhone, and made the news recently after one of its most populated districts was locked down to tame a coronavirus flare-up.

The first chart uses a “willingness index” (measuring searches and inputs into navigation tools) for travel from China’s two biggest cities to Zhengzhou. The second tracks passenger volumes on the city’s subway.

A prominent Chinese official has a favourite alternative dataset

A Communist Party congress effectively removed Li Keqiang from senior leadership in China over the weekend. Li, previously the nation's no. 2 official, is viewed as a proponent of market-oriented reforms.

His prominence inspired the Economist magazine to create the Li Keqiang index. This measure uses high-frequency data – private-sector loans, energy consumption, and rail freight traffic -- to construct an alternative picture.

Li is said to prefer this data to GDP to truly assess the Chinese economy. (Recent research suggests that China is among a group of countries that have been overstating GDP growth by quite some margin.)

That said -- as one can see in the following chart -- both GDP and the Li Keqiang index tend to move in the same general direction.

China business finance is surprisingly strong

There is an outlier to the gloomy picture generally painted by Chinese economic data. Non-governmental business loans are rebounding, helped by the central bank’s August interest-rate reduction. This could be a turning point; when we examined Chinese credit conditions in May, borrowing was not getting any easier.

The following chart tracks month-by-month medium- and long-term private enterprise financing figures for recent years. 

The dark line, for 2022, shows the strongest September reading in recent history. The year as a whole may be on track to outperform 2021, which ended with a whimper. 

UK bankruptcies on the rise

As we recently discussed, the UK economy is struggling for a variety of reasons, from the energy price shock to higher interest rates and increased trade friction post-Brexit.

Business failures are another measure of the economic pain. As our chart shows, bankruptcies are at the highest level in more than a decade, almost twice as high as a year earlier. (The lull in 2020 is notable, when the government was shielding business from the impact of the pandemic.)

With the UK forecast to be in a recession by early next year, a further increase in bankruptcies may be likely. That may well exacerbate the negative feedback loop in the economy – adding to the challenge for whoever succeeds Liz Truss as Prime Minister.

The total return wipeout for government bonds

For bonds, the only way was up for a decade. As interest rates headed on their long-term downward trend, the total return on long-run government bonds (15 years and above) for Germany and the UK approached 100 percent between 2010 and 2020. Some investors may have been lulled into a false sense of security.

As interest rates surge globally, bond prices have fallen tremendously, and investors are sitting on enormous (if unrealised) losses. Over the course of 2022, as our chart shows, the entire total return since about 2012 has been wiped out for long-term gilts and bunds.

 It turns out that fixed income investments are riskier than what was widely assumed.

The following chart can only be accessed with a subscription to ICE BofA Merrill Lynch data.

Approval rating wavers slightly for Putin

The following chart tracks Russians’ opinion of Vladimir Putin, as assessed by the Levada Center, a Moscow-based polling and research organisation. 

According to Levada, the Russian leader’s approval ratings surged after this year’s invasion of Ukraine, as they did when Putin moved to seize Crimea in 2014. Recently, Putin’s approval rating has slipped, though it remains above 75 percent.

Watching small business to predict cooling US inflation

US small businesses are becoming less likely to raise their prices. 

That’s according to the National Federation of Independent Business (NFIB), which tracks smaller firms’ intentions for the next three months, as our chart shows. About 30 percent of businesses surveyed plan a price increase over that time; while that’s still a high number, the proportion was recently above 50 percent.

This data set has a very high correlation (almost 80 percent) with actual inflation dynamics; the consumer price index tends to lag the NFIB moves by about five months. 

We’ve adjusted the timing on the chart accordingly to show just how close the correlation is. Given this correlation, we can anticipate a normalization in CPI data after the soaring inflation of 2022. The Fed’s tightening cycle may already be having its desired effect. 

Perilous territory for mortgage rates and house prices

Hindsight is 20/20 for 2020/21. It is now increasingly clear that both monetary and fiscal policy in the US were too expansionary during the peak pandemic years; nominal gross domestic product (GDP) surged far above trend. The Federal Reserve’s interest rate tightening cycle, the most rapid in decades, is an attempt to play catch-up.  

The chart below shows how the current situation has resulted in an unusual housing market in 2022. Generally, as monthly data points going back to 1975 show, there is a very strong negative correlation between house prices (as measured by the Case-Shiller Index) and rates; house price gains accelerated as mortgages became more affordable.

We highlight the last five months of observations to suggest that house prices are too high in an environment of rising yields and mortgage rates. 

Monetary policy has a long (and variable) lag before it affects the wider economy via the housing market – something the latest Nobel Prize winner, former Fed Chairman Ben Bernanke, has written about extensively. Some fear the Fed has already over-tightened and the US housing market is cracking under pressure. We will know by the beginning of next year.   

Mortgage rate heat map is glowing red for 2022

The heat map below shows how the surging US mortgage rates of 2022 are unprecedented compared with 31 years of recent history. It tracks the three-month change to the 30-year fixed rate in percentage-point terms. 

For most of 2022, the heat map is showing an increase above 1 percent. That exceeds the steadily “hot” (and famously disruptive) tightening cycle of 1994. Though these increases have already cooled down the housing market, more pain is likely to come.

Another measure of deteriorating home affordability

The US National Association of Realtors compiles a housing affordability index. It tracks price and income data to measure whether or not a typical family earns enough to qualify for a 30-year mortgage on a typical home.

Rate increases are highly negatively correlated with this index, as our chart shows. It tracks monthly data points going back to 1982. 

We have inverted the Y axis to highlight how the last four months show historic pressure on affordability. Monthly payments are significantly higher than just a year ago, while prices increased at a spectacular rate until this summer (as the size of the recent individual dots, or “bubbles,” shows).

Europeans are experiencing inflation differently

Everyone is suffering from inflation, but some major European countries have it worse than others, even within the Eurozone. And the differences are widening.

As the Dutch inflation rate soars toward 15 percent, inflation in France is at a much more moderate 5.5 percent. Meanwhile, Switzerland is only experiencing 3 percent inflation, as our chart shows. 

The dispersion is explained by different degrees of energy dependency and the energy mix of production. The Swiss are somewhat protected by their strong and appreciating franc, one of the major safe-haven currencies. France caps electricity prices, putting the burden on the state finances rather than the consumer. But the other countries’ consumers are more directly exposed to the energy crisis. (The Dutch combine dependence on gas for heating with a statistical quirk that boosts their reported figure.) 

Europeans are expecting inflation to last for years

The European Central Bank surveys consumers to measure their inflation expectations. As real-time inflation rises, so do consumers’ expectations of future inflation, our newly added ECB survey data shows. This is probably not surprising. 

But the major headache for the ECB is that consumers aren’t on “team transitory.” As our chart shows, Europeans expect medium-term (three-year) inflation to rise, persisting beyond the short run. This trend is broadly similar across the eurozone.

Unanchored inflation expectations are one of central bankers’ biggest fears. These data points will support the more hawkish policy makers in Frankfurt, and the view that more rate hikes are needed right away to bring inflation back down in a reasonable time frame.

Japanese households are starting to struggle

The inflation rate in Japan is one of the lowest in the OECD. But the nation’s households are still under pressure. 

As our chart shows, household spending is up more than 5 percent year-on-year in nominal terms, while incomes have slipped about 1 percent.    

To make up the difference, households might be spending money they would have saved in the past. That said, the savings rate is staying steady at about 10 percent -- quite elevated compared to the pre-pandemic “old normal.”

The underpriced Japanese yen

The Japanese yen is at its weakest in 30 years, approaching the fateful 150 mark versus the dollar. That might be the line in the sand for the Bank of Japan, which recently intervened in the currency market for the first time in decades.

The following chart tracks our simple valuation model. It’s based on high-frequency data such as interest rates and measures of Japan's terms of trade, equity prices and OECD economic indicators.

Our model tracked the value of the yen quite well until a few months ago. But there is now a record gap between the currency’s predicted value and the much weaker actual exchange rate.

Based on fundamentals, there is room for the yen to rebound.

US Democrats improve their electoral chances but it is likely not enough

The US midterm elections are less than a month away. Many Americans think they are already experiencing a recession and are unhappy with the spike in inflation. That’s bad news for President Biden’s party.

Our chart tracks Fivethirtyeight (whose model is essentially a polling aggregator) and PredictIt, a market that allows people to bet on election outcomes. 

The Democrats have improved their chances over the summer. Even so, PredictIt gives the Republicans a roughly 80 percent chance of winning the House of Representatives. Fivethirtyeight is slightly more optimistic for the Democrats, but still gives the GOP a 70 percent chance of controlling the House.

Norwegian oil riches

The surge in oil and gas prices has massively improved Norway’s fiscal position. 

As our chart shows, the government’s revenue from petroleum activities is expected to surpass 20 percent of GDP this year and next. 

It’s interesting to track the net transfer to the nation’s famed sovereign wealth fund. During the worst of the Covid-19 crisis, that net transfer was slightly negative as the government withdrew funds to pay for pandemic relief measures. Positive transfers have resumed again and are expected to exceed 1 trillion kroner (USD 90 billion) this year. 

Credit Suisse is stressed but not the new Lehman

Speculation about the future of Credit Suisse was rampant over the past week. Swiss central bankers said they were monitoring the situation.

On Oct. 7, Credit Suisse responded with a debt buyback to reassure the markets while it plans a major overhaul.

As the chart below shows, this year, the bank’s credit-default swaps (CDS) have spiked along with the European Central Bank’s Composite Indicator of Systematic Stress (CISS). It’s worth noting that the two stress measures moved more or less in tandem until about 2013, before and during the global financial crisis and the subsequent European debt crisis. Perceived risk for European banks generally stayed higher thereafter. 

Capital requirements for banks are much higher than before the GFC, and policy makers are very unlikely to allow another “Lehman moment” where a financial institution gets into trouble and contagion spreads to the others. It’s worth noting that banks were relatively unscathed by the pandemic as central banks provided markets with an enormous amount of liquidity.

Semiconductor stocks have a rough 2022

The Philadelphia Semiconductor Index (SOX) includes the 30 largest US companies in the sector. It’s closely watched because chipmakers are considered particularly sensitive to the economic cycle.

As our chart shows, chip stocks are seeing a substantial drawdown. The SOX is down almost 40 percent this year, putting 2022 on track to be one of its three worst yearly performances.  

With central banks continuing to hike and tech companies announcing hiring freezes, there might be more pain to come.

South Korean chip production cools

It’s not just the US chip sector: the following chart shows how South Korean semiconductor production is slowing. 

South Korean trade data is often regarded as a “canary in the coal mine” because the country exports so many high-tech products to the rest of the world. When Korean exports stall, this usually indicates a period of cooling global demand. 

Domestic inventories of chips have increased significantly since the end of last year, while shipments have declined. That could well indicate bad news for the global tech sector. 

Autumn is the season for end of year rallies

Data indicates that stock markets display seasonality, and we’re heading into a historically bullish period. 

August and September are notoriously difficult months for US equities. Those “autumn blues” are often followed by a recovery. 

The following chart tracks the historic October-December performance by the S&P 500. On average, stocks go up about 2.5 percent in the fourth quarter. The distribution of outcomes is extremely wide, however. (A couple of famous October stock-market crashes come to mind.)

October of 2022 has already been particularly striking. The S&P 500 is up 5 percent, though it’s still more than 20 percent down for the year.

Simultaneous stock and bond slump bucks the historic correlation

Most of the time, equities and bonds are negatively correlated: stocks slump, investors move to relative safety in fixed income. Risk-off days. However, it’s well-known that this correlation shifts over time and is dependent on the macroeconomic regime. 

The chart below shows S&P 500 drawdowns are often accompanied by substantial returns in the bond market. (Most notably in this chart, at the outbreak of the pandemic.) 

The current macro environment is very different: we’ve seen equities and bonds slump simultaneously. That’s due to a combination of high inflation and rapidly rising interest rates. 

Insofar as central banks are trying to cool demand with their rate hikes, they are probably succeeding by creating a huge negative wealth effect, i.e. slumping asset prices.

China seems less likely to catch up with US gross domestic product

The China-US GDP gap is widening again – in fact, reaching its widest in 12 years. 

China watchers have long speculated about when the Asian nation will overtake the US to become the world’s biggest economy. Indeed, when adjusting for purchasing power parity, the Chinese economy is already larger given the nation’s much lower consumer prices.

Of course, to truly measure an economy -- by its share of global GDP -- one must look at total output in nominal terms.

 While China had been catching up for decades, the gap started to widen rather than narrow this year, as our charts show. US nominal GDP is forecast to grow more than 7 percent this year, almost double China’s 4 percent pace. Meanwhile, the dollar is strengthening against almost all currencies, including the Chinese yuan.

That means China’s GDP is actually contracting in dollar terms. Given the nation’s severe slowdown, driven by the real-estate crash, and its very adverse long-term demographics, China might never overtake the US economy in dollar terms.

Asia is aging

Asian economies are seeing their population age rapidly, most famously in Japan, where the share of people aged 65 and over is approaching 30 percent. That’s up from 20 percent in 2002.

South Korea and Singapore are experiencing a very similar albeit less extreme trend. The share of people aged 65-plus now exceeds 15 percent of the population in both economies.

Even though China’s GDP per capita is significantly lower than these countries, it now has an age profile very similar to that of South Korea as a result of the strict one-child policy implemented decades ago.

China watchers are concerned that the aging population will strain the pension system to its limit well before the nation becomes an advanced economy. 

The importance of watching data revisions

Economic data is often revised, and when it is, historic anomalies can evaporate.

Earlier this year, we examined the perplexing gap between US GDP and GDI (gross domestic income), which reached a record 4 percent. We published a chart showing the record divergence between the two measures, and argued that the US was very unlikely to be in a recession even as GDP declined for two consecutive quarters. GDI growth was significantly healthier at the time. 

The Bureau of Economic Analysis released revised data on Sept. 29. As our chart shows, this revealed that the GDI-GDP gap has narrowed significantly to its usual pre-pandemic level of about 1 percent.  

Firstly, GDI was significantly revised downward. Secondly, GDP was significantly revised upward – mostly for pre-2022 data, as the first half of this year still shows two quarters of negative growth.

Social progress versus GDP per capita

We recently posted a chart showing the strong correlation between corruption and GDP per capita. There is a similar correlation between income per head and broader measures of social progress. 

Our final chart tracks an index from Social Progress Imperative. It comprises 50 measures related to basic human needs (shelter and nutrition), the foundations of wellbeing (health and environment), and inclusiveness (equality and access to education).

It’s easy to explain why a positive correlation emerges over time. Rich countries have the capacity to invest in a cleaner environment and better education and healthcare, while striving for a more equal and progressive society in general. Poorer countries often lack the means to achieve progress in any of these areas.

Progress on education, inclusiveness, and the environment also pays off in terms of higher long-run economic growth rates. The causality relationship between GDP per capita and social progress likely works both ways.