May new home sales: Another poor month for sales, prices stable, inventory increasing

 

 - by New Deal democrat

To start with the usual: new home sales are very volatile and heavily revised, which is why I pay more attention to single family permits. But they are the most leading of all the housing data; and averaged over three months, much of the noise goes away.

In May, new home sales declined -46,000 annualized to 580,000, just above their 3+ year low set in January:

This likely in part reflects the recent uptick in mortgage rates - but again it is within the range of noise. The three month moving average is virtually unchanged, but at the low level it has been for most of this year so far, which suggests that single family permits (red, right scale), which convey more signal, are likely to hold steady or even decline further from their recent range.

Meanwhile, the median price for a new home - which is not seasonally adjusted, so should be compared YoY - was almost exactly unchanged from one year ago (red, left scale):

The longer term trend over the past three years of slowly declining prices remains intact.

This is largely in accord with existing home sales, where the median price through May was up 1.3% YoY, and the Case Shiller and FHFA repeat home sales prices, which were up 0.7% and 1.7%, respectively. The difference is that home builders can change, and have changed, price points, not just by lowering profit margins, but also by building more densely, or smaller square footages, or fewer amenities - which they have done.

Finally, let’s look at the inventory of new houses for sale. As a refresher, here is the historical view of the leading/lagging relationship between the number of houses sold and houses for sale:

Inventory is generally the last shoe to drop in the housing market before recessions begin. But as I noted last month, there has been an interesting wrinkle this year, as inventory has turned back up:

This is all but unique. Historically a recession will not occur until inventory turns down again. But to reiterate, housing has been recessionary for a year, and yet no recession has occurred. The same has been true for motor vehicle sales. 

In summary: not a good report, it looks like housing is taking another step down. But no upward price pressure, and no indication of broader negative implications for the economy.

Consumer spending has turned red hot - expect no recession in the immediate future

 

 - by New Deal democrat

Well, I was working on one nerdy long-term historical post this morning, when I decided to check the weekly update on consumer spending from Redbook. And, as you’ll see below, that was the end of that! (I may yet follow up this afternoon. We’ll see.)

Last week, Redbook consumer spending was higher by 10.0% YoY! That’s the biggest YoY gain since the end of 2022:

You are simply *NOT* going to have a recession in the immediate future in the face of that kind of increase in consumer spending, especially when even the recent spike in CPI only brought it to a 4.2% YoY increase. I have seen commentary that the big pick-up in consumer spending is due to bigger tax refunds, which may be true given that the recent surge started right after April 15. If that’s the case, I would expect it to subside as the summer goes on.

This plays directly into the “quick and dirty” forecast method I highlighted yesterday: if stock prices are higher YoY (a proxy for the producer side), and jobless claims are not higher by over 10% YoY (a proxy for job security); and also if real retail sales (a proxy for the consumer side) are higher YoY - there has never been a recession, going all the way back to World War 2.

The “quick and dirty” forecasting method has been flawless

 

 - by New Deal democrat

On Friday I wrote about how I have been rethinking the long leading indicators — those that are useful for forecasting the economy 12-24 months out — because while when they are positive, the economy has been as well, but when they have been negative (twice) in the past 15 years, the economy has weakened but not gone into recession. They have functioned more like a “severe weather watch;” i.e., conditions are favorable for development, but by no means more likely than not.

By contrast, the “quick and dirty” short term forecasting system has been flawless.

What is the “quick and dirty” system? Simply look at the stock market and the four week average of initial jobless claims. If the stock market is lower YoY, and the four week moving average of new jobless claims is 10% or more higher YoY, the economy is likely to fall into recession in the next several months. Otherwise, the economy will remain in expansion.

Let’s take a look. The below two graphs track stock prices (gold), the four week average of initial jobless claims (red, inverted and adding 10 so that any YoY change of higher than 10% shows below the zero line); and also adds real retail sales YoY (blue), which has also had a very good long term record; first for the four years before the pandemic:

And here are the five years after the pandemic:

As you can easily see, at no time have both stock prices and the four week average of initial jobless claims been below the zero line together. In 2018, stock prices and real retail sales were negative for only one month, but jobless claims were doing very well. And in mid-2023, the system never quite signaled — stock prices went positive YoY one month before jobless claims turned sufficiently negative. And real retail sales likewise turned positive with stock prices.

Currently all three metrics are solidly positive, signaling economic expansion will continue for at least the next few months.

And what of the pandemic? Here is the close-up of 2020:

The pandemic lockdowns began roughly on March 9. Within several days, the stock market turned negative YoY, and jobless claims also did so by more than 10% on March 21 (in fact, there were such severe layoffs that I’ve had to cut the scale by 100!). By early May the stock market had turned positive again. Real retail sales also turned negative in March, and turned back positive in June.

LIke I said: quick and dirty - and flawless.

Weekly Indicators for June 15 - 19 at Seeking Alpha

 

 - by New Deal democrat

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

There was another air pocket this week in withholding tax payments, and some weakening in mortgage applications, but the overall tone remains positive, despite the ongoing international chaos emanating from Washington.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and help me with my lunch money.

Rethinking the long leading indicators

 - by New Deal democrat

I’ve been writing about the economy, and employing forecasting models, for over 20 years. For the entire duration of the period, there have been portents of DOOOM written about by many others. I have been much more cautious, going on “Recession Watch” only twice since 2008: in 2019 and late 2022. I have never gone on “Recession Warning.” 

Which is broadly concurrent with the economy since then. Since June 2009, the economy has been in recession for only the 2 month period immediately after COVID hit and brought society to a near standstill. For the other 200+ months, it has been expanding.

We’ll never know if, absent COVID, there would have been a recession in 2020, although at the time I believed we were going to narrowly miss it. But in 2022, the broad warning signs were manifest - and yet no recession occurred anyway.

So, after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up. I make use of the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), plus common measures of the yield curve, and also real retail sales per capita.

Let me start with Prof. Moore’s four components [Note: all of the below graphs use YoY% comparisons for easier viewing; although the models generally use the absolute measures]. Here are corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits, covering the periods of 1960-94, 1995-2026:

Although the data is very noisy, when we look for periods when *all 4* components were at or below 0, the only such times were roughly 1 year before the onset of each recession, plus 1966, as well as the 2019 and 2022 periods. Plus last year, as shown in this close-up

Between December 2024 and May 2025 all four were negative. Again, although we came close last year, no recession has occurred as of June 2026.

Next, let me compare corporate bond yields as above with the 10 year Treasury minus 2 year yield, calculated as the YoY change (thus, for example, if the spread declined form +0.40% to +0.20%, this shows up as a -0.20% change). Here’s the entire period from the mid-1970s to the present:

While both measures are negative before the onset of recessions - frequently reverting to positive immediately beforehand as the Fed lowers interest rates - there are a number of false positives as well, in 1984, 1994, 2016, and very much so in 2022. The message I take away from this is that interest rate changes are probative, but they give too many false positive recession signals. Meanwhile, housing measures, while also probative, focus on too narrow a slice of the economy.

So let’s turn to the broad “real world” long leading indicators, comparing corporate profits and real retail sales per capita. Here’s what they look like from 1953-2000, 2001-2019, and 2020-present:

I’m much more satisfied with this measure. The only times both measures (using a 3 month moving average for real retail sales per capita) have been simultaneously negative has been shortly before recessions have begun, with the false positive of 1966 and one quarter in 2022.

And those two misses have something in common: massive fiscal stimulus. In 1966 LBJ’s “guns and butter” budget poured massive amounts of spending into both military spending and domestic social program spending. In 2021, the COVID stimulus had led to an abrupt 15% increase in retail spending, but with an absolute lower level of employment. Profits boomed, then paused, but clearly could - and did - boom further as businesses amped up production and hired more employees as the COVID supply bottlenecks unspooled.

This is an intellectual work in progress, so there is much more to think about. But preliminarily, my takeaway is that while interest rates and real money supply are important background conditions, that is all they are. The “real world” early indicators from housing, corporate profits, and real consumer spending per capita are necessary for confirmation. And I need to take a more detailed look at fiscal conditions and price level shocks, which often seem to be precipitating elements for recessions.