Macro Hacks

“Let me tell you this, the older you get the more rules they're gonna try to get you to follow. You just gotta keep livin' man, L-I-V-I-N.”
-Matthew McConaughey, "Dazed & Confused"  

So I’ve been doing this for a decade now.  

And somewhere between leaving my PhD program for Hedgeye 10 years ago and drinking too much last night as recompense on a misconceived Matthew McConaughey related bet (I’m not a true McConnoisseur (get it?), apparently), I became both a literal and figurative gray beard. 

Gray beard status is a two-sided temptress.  On the one side, you can’t get succulent macro (contextualization) flavor without proper seasoning.   

But, on the other side, the same protracted immersion that cultivated that analytical succulence also leaves you at risk of unwittingly talking over your audience.  

Summer social events serve as a convenient litmus test ….. when you just kind of say macro/investment related stuff like its common knowledge and people have no idea what you’re talking about, even those who work in finance – your descension to gray beardedness is complete.    

If you’re reading this presumably you have some macro analytical aspirations and, if so, there are some things you just have to know.  

Back to the Global Macro Grind… 

Here’s a quick, quasi-random selection of requisite macro hacks.  Since it’s Jobs Day, we’ll start with a few NFP related: 

1. Aggregate Hours Growth = Real GDP Growth (proxy):   The NFP release gives you the number of people working and how much they work each week.  The product of those two factors gives you aggregate hours. If you assume stable productivity, more hours worked = more output.  In other words, if you are producing the same amount of stuff per hour but you have more people working more hours then real GDP will be higher.  This should be obvious but just plot real GDP growth vs. aggregate hours growth if you need to convince yourself.
2. Aggregate Hours Growth + Wage Growth = Income Growth (proxy):  If you take aggregate hours growth from above and add earnings growth (also from the NFP release) you get implied aggregate income growth.  Because income defines your capacity to consume, the slope of the income growth line also represents the baseline outlook for consumption growth.  The NFP implied aggregate income growth gives you your lead read on the directional rate-of-change in the official income and spending data released at the end of the month.   
3. Aggregate Hours in the Manufacturing Space = Industrial Production growth (proxy): Again, the NFP release gives you the number of people working in the manufacturing industry and how much they work each week and the product of those two factors gives you aggregate hours.  Because manufacturing activity predominates in the Industrial Production data, aggregate hours growth in the manufacturingspace implied by the NFP data gives you your lead read on the sequential growth in the official Industrial Production data released later in the month.   
4. Initial Claims:  Initial Jobless claims tells us something about the separations side of the Net Hires = job findings + job separations side of the equation and they provide a low-intensity means of tracking the cycle.  In short, a recession is not imminent so long as initial claims continue to make lower lows.  You don’t have a recession or negative consumer credit related shocks with job loss increasing. In fact, initial claims have been one of the most consistent lead indicators of the cycle with peak improvement in rolling 3Mo. claims preceding the peak in the economic cycle by an average of 7 months over the past 7 cycles.  Rolling claims are still making lower lows at present.
5. GDP Deflator less Unit Cost Growth à this is your proxy read on corporate profits.  The GDP deflator represents the rate at which GDP representative goods & services prices are rising while Unit Cost growth represents the cost growth associated with producing/providing those goods and services.  If input costs are growing faster than output prices, that is not margin positive.  The converse, of course, holds as well.   
6. Prices Paid vs Prices Received:  This is an offshoot of the previous hack.  A cross-section of the Fed Regional Survey’s ask about price trends for inputs and output.  If the spread between prices paid and prices received is expanding, expect margin angst and headline newsflow around the topic to percolate as it has alongside the transportation bottlenecking and tariff related raw material spikes in 1H18. 
7. Capex & Wage Growth:  The NFIB small business index on capital spending plans and compensation plans lead changes in non-resi capex and earnings growth by 2-3 quarters.  If you need a trend view on those dynamics and can’t otherwise compile a compelling mosaic, just fall back on the implied trends there.   
8. Gold:  If the dollar is strengthening, you probably don’t want to buy gold.  If the dollar is strengthening and domestic real yields are rising, don’t buy gold.  If the dollar is strengthening, domestic real yields are rising and growth is accelerating (on both an absolute and relative basis), definitely don’t buy gold.
9. EM:  If the dollar is strengthening, you probably don’t want to buy EM assets.  If the dollar is strengthening and domestic real yields are rising, don’t buy EM.  If the dollar is strengthening, real yields are rising and growth is accelerating (on both an absolute and relative basis), definitely don’t buy EM  
10. Sentiment:  Anytime speculative futures and options positioning moves beyond +-2.5 standard deviations, take notice.  If you have a convicted contrarian thesis, even better.  An incorrect and (way) offsides consensus is the stuff reflexive price action is made of. 
11. PHS vs EHS:  Pending Home Sales = Signed Contract activity while Existing Home Sales = Closed Transaction volume.  That the former inherently leads the latter seems so self-evident that its hard to imagine it needs to be stated explicitely.  It’s amazing that consensus estimates for EHS still consistently diverge from the trend implied by PHS.  With PHS signaling sequential softness in EHS (where estimates were for sequential strength), the last couple months have been a nice case-study in this phenomenon.    

There are a lot more, but we’ll leave it there for today. 

Before closing, I wanted to highlight some consequential changes associated with the Benchmark revisions to the national accounts data that accompanied the 2Q18 GDP report. As has been well covered, the benchmark revisions update the historical GDP input data (i.e. Income, Consumption, Investment, etc … all the way back to the 1920’s in some cases) and there were largescale, positive revisions to both personal income and the savings rate, associated primarily with an upward revision to small business and sole-proprietor income estimates.  

The implications are not insignificant as the new estimates represent a wholesale shift in the base effect and Income-Saving-Consumption dynamics relative to those existing prior to the revisions.  

The Chart of the Day below shows both the Revised and Unrevised estimates for the Savings Rate, Private Sector Income Growth and Real Consumption Growth.  

Savings Rate:  The savings rate had previously been estimated to be running near all-time lows (2.7% last) while falling 80-100 bps year-over-year the past few years.  The falling savings rate was supporting consumption growth in the face of flattish aggregate income growth, but with little downside left it was set to become a progressively diminishing tailwind to consumption growth.  In other words, the onus would increasingly fall on wage growth which would have to accelerate meaningfully to buttress household spending growth.  That is no longer true following the revisions.  In fact, the dynamic has reversed.   

Income Growth:  Prior to revision, comps for aggregate private sector income growth were progressively easier through August and, by extension, supportive of consumption growth.  That is no longer the case following the revision.  In fact, comps actually get progressively more difficult the next few months before easing into year end. 

Consumption Growth:  Comps for Spending Growth, in contrast, are modestly easier the next couple months relative to what they were prior to revision.  

Triple-net, none of this changes our outlook for the path of growth and inflation over 2H but it doesn’t represent a significant shift in the prevailing, underlying fundamental dynamics.  

In particular, whereas the savings rate was set to become a headwind to reported consumption growth prior to the revision, it now has significant room to decline in the service of supporting consumption growth should accelerating wage inflation be slow to manifest.  At best, an acceleration in wage growth and aggregate income growth could combine with a falling savings rate to provide a durable support to consumption.  

Layering fiscal stimulus atop an already taut, late-cycle economy is anomalous and it presents and interesting, somewhat anomalous potentiality as households could see improved consumption capacity at the same that both headline growth and inflation (domestically and globally) are slowing and yields are making lower highs.   

These wild-card dynamics are also why we haven’t gone explicitly bearish on domestic consumption related exposures while beginning to rotate out of growth and elevating defensive yield (Reits/Utes) into our Top 3 sector style exposures. 

Tops remain processes, not points and there’s no clean, static answer on how to risk manage the crest and roll other than to measure and map the data and evolve the outlook dynamically.  That’s why we’ll be back detailing that evolution on Monday, and everyday. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now: 

UST 10yr Yield 2.88-3.02% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 51.81—53.14 (bullish)
REITS (VNQ) 79.85-82.93 (bullish)
Industrials (XLI) 73.04-77.21 (bearish) 
Nikkei 226 (bullish)
DAX 129 (bearish)
VIX 11.50-14.30 (bullish)
USD 93.90-95.35 (bullish)
Oil (WTI) 67.26-70.39 (bullish)
Nat Gas 2.69-2.84 (bearish)
Gold 1 (bearish)
Copper 2.69-2.85 (bearish)

Have a great weekend.      

Christian B. Drake
U.S. Macro Analyst