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Dallas Data Deluge - June 25, 2019

This week our attention was pulled to Texas, where record-setting rain has accompanied some stormy data.

 “Expansion Continues but Pace Slows”

 The June Texas Manufacturing Outlook Survey struck like a bolt of lightning yesterday. The widely reported general activity index “pushed further into negative territory” as it dropped from -5.3 to -12.1, significantly missing analyst expectations of -2.0 and “hitting a three-year low”. The company outlook also dropped to a three-year low as it “fell from -1.7 to -5.5”, and the outlook uncertainty index “pushed up to 21.6, it’s highest reading since the question was added to the survey in January 2018”. However, the outlook “regarding future business conditions were mixed”. Admittedly, the data was collected “June 11-19”, right after both real meteorological storms and the storm of Trump’s threatened tariffs on Mexico, so the results may be overly gloomy. Time will tell if the first or second part of the release’s title, ‘Expansion Continues but Pace Slows’, will be prescient.

 “Concerned About an Inversion of the Curve”

 More dour data came from Dallas Fed President Robert Kaplan in his speech on Economic Conditions and the Stance of Monetary Policy. On top of directly addressing the tail risks posed by severe weather events, Kaplan had words of warning. First, Kaplan warns that “tariffs and trade uncertainties may be impacting manufacturing activity” and have a “chilling influence” on capital spending plans”. What’s more, should trade turbulence continue, “slower growth outside the U.S. is likely to translate into slower growth in the U.S.”. Second, Kaplan warns of the danger around monetary policy. He is “concerned that adding stimulus, at this juncture, would contribute to a build-up of excesses and imbalance... which may ultimately prove to be difficult and painful to manage.” He is also “concerned about an inversion of the curve... of some size and duration.” Building on his previous statement, Kaplan believes that a persistent inversion “would likely begin to impede the creation of credit and lead to a tightening of financial conditions”.

 “Actual Wage Growth Is Understated”

 News about the labor market was the silver lining from recent Dallas data. The Texas Manufacturing Survey Labor market measures “suggested solid, but somewhat slower growth” and Kaplan discussed how “a tight labor market has given an added boost to consumer spending and confidence”. However, there was even better news in the form of a two-part series on wage growth published by the Dallas Fed. In collaboration with Robert Rich of the Cleveland Fed, Joseph Tracy and Michael Morris uncover two reasons why “actual wage growth is understated”. In the first paper, the authors dissect how changes in average hourly earnings, AHE, are different from average wage growth, and find that “on average, recent real wage gains have been meaningful and are more consistent with recent historically low unemployment rates”. In the second paper, the authors point out that the Census survey they used to compute average wage growth does “not include individuals who change residences” and construct a model to incorporate “movers”. Rich, Tracy, and Morris use an alternative Census survey to capture movers, and find that “the exclusion of movers... leads to underestimation of the average individual wage growth rate”.