April retail sales: consumers may be switching to “wait and see” mode

 

 - by New Deal democrat

Consumer spending is about 70% of the economy, and retail sales is our first wide measure of that spending. For the second month in a row, this morning’s update for April was unsurprisingly dominated by what happened at gas stations. 

Nominally, total retail sales rose 0.5% in April, But after taking the monthly 0.6% increase in consumer prices into account, real sales declined -0.1% (blue):

But let’s take a look at the impact of gas prices. The below graph shows total retail sales (blue), and also retail sales minus gas (gold), both nominally. As per the above, total sales rose 0.5%. But sales ex-gas only rose 0.3%:

Now let’s look at real sales ex-gasoline. The below graph shows real sales ex-gasoline, deflated two ways; first, by the headline CPI number (blue); and second, by CPI excluding energy (gold):

Deflated by headline CPI, retail sales excluding gasoline declined -0.4% in April, and remain below their peak last August. Deflated by CPI less energy, they declined -0.1% from their peak in March. And although I won’t show the graph this month, it is interesting that the same phenomenon occurred in the 20006-07 period before the Great Recession, where total real retail sales trended slightly higher, but excluding gasoline trended lower.

On a YoY basis, nominal total retail sales were up 4.9%, but in real terms were only up 1.1%:

Excluding gasoline, nominal sales YoY were up 3.7%, and in real terms *down* -0.1% using headline CPI, and up 0.8% using CPI excluding energy:

In the March personal income and spending report, we saw that consumes handled the first month of gas prices increases by essentially just putting the extra spending on their credit cards. While it is certainly within the range of noise, the retail sales report for April suggests that consumers have transitioned to a “wait and see” pattern, withholding additional purchases until they see what happens next with gas prices.

Finally, since consumption leads employment, here is the update of YoY total real sales (/2 for scale) together with employment (red):

This suggests that on a YoY basis the stabilization we have seen in the last two jobs reports is likely to continue in the next several months. Which means it is not likely to be recessionary, but more likely to be in “wait and see” mode as well.

How mass immigration raids might explain the historic lows in jobless claims

 

 - by New Deal democrat

I want to write an extended discussion of the April retail sales report released this morning, to tease out the effect of the spike in gas prices, but first let me do my usual weekly update on jobless claims. These have historically been a good short leading indicator for the economy, but it is possible that is being distorted now.

As per the last six months, new jobless claims, along with the Boom (or maybe bubble) in the stock market, are the most positive of all of the current economic indicators. For the week, initial claims rose 12,000 to 211,000, while the four week moving average rose 750 to 203,750. Although I won’t put up the long term historical graph, these continue to be lower than at any point between 1970 and 2018, and at the low end thereafter. Continuing claims, with the typical one week delay, rose 24,000 to 1.782 million. Historically this is also lower than at any point between 1975 and 2018, although they were much lower in the immediate post-pandemic Boom of 2021 through mid-2023:

As per usual, the YoY% change is more important for forecasting purposes, and so measured initial claims were down -6.6%, the four week average down -11.1%, and continuing claims down -5.4%:

Since it is early in the month, I’ll dispense with my typical look at what that might mean for the unemployment rate. But let me briefly address why jobless claims might be so historically low, particularly as the US population has doubled since 1970. Indeed, as a percent of the labor force, or of the US population as a whole, the number of claims in the past six months has been tied for the lowest ever with brief periods of time in 2022 and the end of 2023, as shown in the below historical pre-pandemic graph that is adjusted to show the current rate at the “0” line:

Is business humming in a way it never has before? Probably not. The most likely explanation has to do with immigration and the deportation raids that became more widespread in the past year. 

Let me state right off the bat there is really no good, on-point statistic that I can find. The situation is opaque, but if we look at monthly employment and unemployment statistics by native vs. foreign born status, and by ethnicity, at least some light may be shed.

Every month the Household Survey in the Employment report includes numbers for the employment level of native vs. foreign born persons. Since these are not seasonally adjusted, the best way to look at them is the YoY% change:

I should note that the Household Survey has shown absolute YoY declines in employment for the past several months. What is noteworthy for this discussion in the above graph is that the YoY employment level for immigrants turned negative rapidly last summer as immigration raids became more widespread, and with one exception has remained negative ever since.

Similarly, the Household Survey tracks the unemployment rate by several ethnic groups, including Hispanic or Latino. Again, these are not seasonally adjusted, so the below graph tracks the change in the percent unemployed YoY:

Note that the change in the unemployment rate turned lower for immigrants (gold) by last summer, and with two exceptions has remained lower ever since, even as the unemployment rate in total (dark blue) and for the native born (purple) has remained higher. And the unemployment rate for Hispanics has generally been the lowest of all (red).

Either uniquely immigrants, especially HIspanics, are not being laid off — *extremely* unlikely — or they are not making claims or even willing to discuss their job status with Census Bureau phone interviewers, which is much more likely. This seems particularly true since both the employment level and the rate of those who are unemployed have *both* declined, suggesting a reluctance to interact with the system.

I want to point out that the above explanation is necessarily speculative, and based on information that remains murky. But it does seem to explain the unusual information about jobless claims we’ve been getting for this year.

The inflationary, “K”-shaped T—-p economy

 

 - by New Deal democrat

There are times when the economy is undergoing such a profound shift that there is suddenly a lot to say. This is one of those times. I have been meaning to put up a post like this for several weeks. Let me at least make some of the important points today.

Sixteen months into this (mal-)Administration the fundamentals of the paradigm shift are apparent. It is:

(1) inflationary, and 

(2) K-shaped (i.e., the top 10% or so is doing very well, while the lower 50% or more are just barely holding their heads above water, if that).

It helps to think of the T—-p economy as a mafia bust-out, where the “mark” is the US Treasury.  In a bust-out, the mafia takes control of a legitimate business, runs up credit as much as they possibly can, they and their cronies profit handsomely, and then they leave the mark with a bankrupt shell. Translated to the US economy, the nation’s credit (i.e., the national debt) is being run up with wild abandon. T—-p, his family, other insiders, and the GOP zealots he needs to keep on board are profiting handsomely. Ultimately it is the mass of US taxpayers who will be left with the bill.

Let’s start with the inflationary aspect, beginning with this morning’s producer price index report. In the month of April alone, the price of goods used in production increased 2.0%, services increased 1.2%, and the total index increased 1.4%. Again, that is for one month alone. On a YoY basis, goods prices increased 6.3%, services prices increased 5.5%, and the total (blue in the graph below) increased 6.0%. Further back in the supply chain, the prices of raw commodities (gold) increased 2.7% in April alone, and 9.8% YoY. The below graph also includes YoY headline CPI (red) for comparison:

All of these are on the upswing, and sharply so. In each case, the YoY increase has been the highest since at least three years ago.

Further, because at least some of the producer prices increases have yet to make their way to consumer prices, even if producer price inflation were to halt here, we could expect a continuing spike in consumer inflation in the months to come.

The sources of this surge in inflation are not hard to spot: the closure of the Strait of Hormuz and all the products flowing through it due to the monstrously foolish Iran war; and also the continuing effects of T—-p’s tariffs (remembering that even though the Supreme Court struck down the first batch, the Administration immediately used another source of purported authority to impose a second batch).

And the 800 pound financial gorilla in the room, the Treasury bond market, has noticed. Here is a graph of interest rate yields on the 10 year (red) and 30 year (blue) Treasury bonds for the past 4 years since the Fed started to increase interest rates:

The 10 year bond closed yesterday at 4.42%, and as I write this is trading at 4.48%. And the 30 year bond closed yesterday at 4.98%, and is at this moment trading at 5.04%. With the exception of a brief period during late 2023, both of these since T—-p started office in January 2025 are at levels not seen since 2007. 

Simply put, bond traders are demanding a higher return for taking the risk of holding on to longer dated US Treasurys.

Now let’s turn to where this cornucopia of new debt is winding up. And the answer is, into the pockets of those uppermost on the income scale — hence, the “K-shaped” economy.

Let’s start with a graph of the labor share of income for all workers (blue) vs. corporate profits as a percent of GDP (red):

In this Millennium, the corporate share has surged from 5% to 12% of the entire GDP, currently very close to its highest level, while the labor share has declined by 15% to it lowest ever level as of Q1.

And consumer spending has become ever more concentrated in the hands of the 10% of highest incomes, now accounting for almost half of all spending:

Indeed, as of this week, consumer spending YoY increased by 9.6%, the highest such comparison since the Boom year of 2022:

Further, not even counting March, since the middle of last year, real spending by lower income consumers has actually been in a declining trend, while upper income consumers spending made new highs at the end of last year:

And in March, upper income consumers real spending declined much less than that of lower income consumers.

Specifically as to gas purchases, upper income consumers simply added the increase to their credit cards, while lower income consumers cut back on gas purchases the most:

Meanwhile, on the other side of the ledger, profits as reported by the S&P 500 companies made a new all-time high:

Further, just 5 companies, all associated with AI, have accounted for half of all of the growth in the past year:

This is the most concentrated advance ever.

Finally, let me pan back to focus of aggregate real payrolls. The below graph shows real aggregate payrolls for all workers (blue) and nonsupervisory workers (red). The thin blue and red lines show the same information, but adding 0.2% to YoY inflation as a result of the undercounting of shelter prices during the government shutdown last autumn. Which means you can ignore those lines before that time, but can compare them with the thicker lines predating the shutdown to see the more likely trajectory of real aggregate payrolls:

If there is a faltering of nominal payroll growth, and/or more months of big increases in consumer prices, these will both be negative YoY within several months, and based on past experience over the past 60+ years, that would almost certainly mean that a recession is imminent.

April CPI report shows further surge in gas and electriity prices, raises “yellow flag” recession caution

 

 - by New Deal democrat

As almost universally anticpated, the April CPI continued to reflect the big increase in gas prices - although it didn’t pack quite the wallop that March did. Headline CPI increased 0.6%, following March’s +0.9%, causing the YoY% gain to increase to 3.8%.  Meanwhile the core measure increased 0.4%, causing the YoY% gain to increase to 2.8%. 

In addition to my usual practice of focusing on shelter and any other “problem children” with outsize numbers, this month even more than last month it is important to note the impact on real wages and incomes. Additionally, as I have done for the past few months, please note this IMPORTANT CAUTION: Because the October-November kludge in shelter prices of a mere 0.1% increase for two months is still present in the YoY calculations, and will be until this coming November, this is probably continuing to lower those comparisons by roughly -0.2%. In other words, take out that kludge and YoY headline CPI would probably be 4.0%, and core 3.0%.

First, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which is up 4.1% YoY, the highest in three years:

Before I examine these components further, let me put front and center the impact on consumer incomes. As of April, nominally the average hourly earnings for nonsupervisory workers increased 0.3%, meaning that in real terms they declined -0.3%. Further, aggregate nonsupervisory payrolls increased 0.5%, meaning that in real terms they declined as well, by -0.1%. Here’s what real wages and payrolls look like in absolute terms normed to their recent peaks:

Real wages are down -0.9% from their peak and real aggregate payrolls are down -0.4%.

Neither of these mean that we are in a recession now. But the YoY comparisons are further cause for great concern. On that basis, real hourly wages are down -0.1%, and real aggregate payrolls only up 0.7%:

The former is frequently associated with a near in time recession, and the latter usually crosses the “0” line to the downside within a month or two before or after the onset of a recession. In fact, real aggregate nonsupervisory payrolls have only been higher YoY by 0.7% or less in four months over the last 60+ years without a recession ensuing shortly: once in 1968 and 1996, and two months in 2011. And note that if we add 0.2% to the YoY inflation measures to deal with last autumn’s shelter “kludge,” real aggregate nonsupervisory payrolls are only up 0.5% YoY, and only up 0.2% since last June, as suggested by the below graph, which increases real wages YoY by 0.1% and decreases YoY aggregate payrolls by -0.7%, so that the current YoY values show at the “0” line:

The bottom line is that, with this month’s further surge in inflation, both measures of real wages and payrolls are sending a “yellow flag” recession caution. This puts us back to just above where we were last September. Further, as I wrote recently, a -0.7% decline from peak in real aggregate payrolls is about the median decline at the onset of past recessions.

And the news was worse this month, because shelter costs unexpectedly increased 0.6% for the month, their biggest monthly increase since September 2023. This caused YoY shelter to increase to 3.3%, breaking down to 2.9% for rent, and 3.3% for Owner’s Equivalent Rent:

Finally, several other sectors showed inflationary problems.

Transportation services (mainly vehicle repairs and insurance) followed vehicle prices higher, but recently had calmed. Not in April. Prices increased 0.3%, meaning YoY prices were now higher by 4.3%:

Since vehicle prices themselves have been flat, this may reflect insurance premium increases.

Secondly, and more importantly, electricity prices continued to jump, increasing 2.1% in April alone, and rising 6.1% YoY:

This is almost certainly due to the impact of the building of AI data centers.

Put this all together, and you get a picture where gas prices have continued to surge, and several old problem children -shelter and transportation services - have acted up again. This has had a real, negative impact on ordinary consumer finances.

Needless to say, not a good report.

Existing home sales, prices, and inventory remain rangebound

 

 - by New Deal democrat

Although they constitute about 90% of all housing sales, I don’t pay too much attention to existing sales because they are not nearly so important as new home sales, since the latter involve much more economic activity in the building process, plus more landscaping and furnishings.

As I’ll show below, what has been happening with prices and inventory is more interesting than what has been happening with sales themselves, which have been rangebound between 3.85 million annualized to 4.35 million for the past three years.

And rangebound they remained in April, with a 5,000 annualized monthly increase to 4.02 million. This is also only 0.5% higher compared with one year ago:

Although I’m not showing the 10 year graph this month, the current range is well below the pre-COVID average of roughly 5.5 million annualized sales.

As noted above, the more interesting trend is in prices. These are not seasonally adjusted, so the only good way to look at them is YoY. So measured, they were only up 0.9%:

This is consistent with the near record low YoY increases (outside of the Housing Bust) in the Case-Shiller and FHFA repeat home sales indexes, and the slight YoY decline in new home prices as developers downsize to meet the market.

But in order to bring the housing market back into the equilibrium it was in prior to the pandemic, inventory has to increase, and increase substantially. There the progress is glacial, as existing home inventory was up only 1.4% YoY to 1.47 million:

Meanwhile, similar to the sideways trend in prices in both the FHFA and Case Shiller repeat sales indexes, on a YoY basis prices were only up 1.4%. As the below 10 year graph shows, inventory has mainly recovered from its post-COVID lows, it is still only about 80% of what it was in the several years before 2020.

The past few months have indicated that the housing market has reached a post-COVID equilibrium, with sideways sales and prices, and slowly increasing inventory. Unfortunately, the US needs much more housing to be built in order for it to be as affordable as it was before (actually, several decades before) COVID.

Weekly Indicators for May 4 - 8 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

Surprisingly, most of the data is almost relentlessly positive. In particular, those things most tied up with AI — corporate profits, stock prices, and downstream consumer spending — are particularly strong. Also, American energy companies are making windfall profits from the closure of the Persian Gulf, which makes oil sourced elsewhere rise sharply in price.  

In fact, consumer spending as measured by Redbook, has actually gotten *more positive* YoY in the past few months!

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for my efforts.