This is what entrenched economic power looks like

 

 - by New Deal democrat

As we come to the end of the week after the payrolls report, when typically almost nothing is reported, I wanted to follow up on several posts I wrote last week: one, revisiting the configuration of long leading indicators, and second, that Republics are very durable unless and until they are overmatched by entrenched interests that cannot be dislodged by a majority.

Let me go back to a point I made that recessions don’t happen unless there is a real setback to producers and consumers, as reflected in real corporate profits (blue) and real retail sales per capita (red):

As indicated above, to some extent, America has been economically blessed in that aside from the Giant Flaming Meteor of Death, i.e., COVID, there has been no recession in the past 17 years. That’s quite a good record!

But when one looks at the distribution of corporate profits and worker income, a more disturbing story is told. Here is what (nominal) corporate profits (blue) and aggregate nonsupervisory payrolls look like, both normed to 100 in 1987:

They began to diverge in the 1990s, then much more in the 2000s, further after the Great Recession, and then racheted further out of equilibrium after COVID. As of the first Quarter of 2026, nominally aggregate nonsupervisory payrolls have quadrupled, but corporate profits have increased 20x! Put another way, economic power has become increasingly entrenched among corporate ownership. This is reflected in another graph you may recall seeing here and/or elsewhere in the past few years, of the labor share of the economy, normed to 100 as of its generational peak at the beginning of 2000:

Labor now only takes 87% of what it did then, a new low for this series that goes all the way back to the 1940s. Although I won’t show the graph, labor share peaked in 1960. The 2000 high was 3% below that, and the current share is only 81% of the 1960 share.

This, quite simply, shows economic power becoming increasingly entrenched over time among the wealthy. 

Interestingly, aside from what may be happening at present, only one of the times when the corporate share increased sharply via profits coincided with a tax cut: in the aftermath of George W. Bush’s 2001 tax cut. Perhaps surprisingly, after both recent recessions, that featured extensive stimulus programs, corporate profits surged and the labor share declined sharply. As shown below, despite both stimulus programs real median household declined through 2012 and 2022, respectively:

Which suggests that even though stimulus may be aimed at average American households, the mechanics by which it works is that those households *spend* the payments in order to get them through difficult times. Once spent, those funds wind up in the hands of producers, i.e., they become concentrated in the largest corporations - which don’t spend them, but engage in stock buybacks and soaring executive compensation. So even though they accomplish their short term goal, over the long term they wind up helping to entrench wealth, suggesting that all economic stimulus programs should come with a back end corporate tax surcharge acting to “sop up” those extra gains once the crisis has passed.

This leads to a deeper discussion of the *dynamics* of economics and politics over time; in other words, how this came to be. That discussion involves the economics of bargaining power, the psychology of attraction to gains and avoidance of losses, and how human behavior learning strategies for the same apply, which is something I have read about and studied for decades. But this post is long enough, and rather than turn it into a veritable book, that will be the subject for a follow-up later.

The housing market’s new suboptimal equilibrium: flat, flat, and flat

 

 - by New Deal democrat

It has been four years since the Fed started aggressively raising interest rates, causing mortgage rates to rise similarly. It has been over four years since home sales peaked, and also about four years since the median price of a new home peaked. Finally, it has also been four years since the YoY% increase in median house prices peaked.

In other words, the effects of those interest rate increases have been baked in the cake. It no longer makes sense to forecast based on those price and interest rate hikes of four years ago. To the contrary, as I wrote last month in my summary of that existing home sales report:

“[S]ince the pandemic the dynamics that have been more important have been prices and inventory. Because during the pandemic prices skyrocketed, and inventory cratered. It has been a long, slow arduous process of rebalancing since then…. This year the housing market has appeared to reach a sub-optimal post-COVID equilibrium, with sideways sales and prices, and at best slowly increasing inventory.”

This morning’s report on existing home sales for June confirmed that message: there is a new equilibrium, with sales, prices, and inventory all but flat.

First, to the numbers: existing home sales in June declined -2.4% for the month to 4.09 million, and well within its range of between 3.85 - 4.30 annualized for the past three+ years:

On a YoY basis, sales were up 2.8%.

This is similar to total housing permits, which have varied between 1.4 million to 1.6 million annualized for the past three+ years, and even the more volatile new home sales, which have varied between 575,000-750,000 during that same period:

On a YoY basis, they are down -0.4% and -6.8% YoY.

The sideways story is the same for median prices. The median existing home price is up only 1.8% YoY (the NAR does not seasonally adjust this metric, so YoY is the only valid way to measure:

Since February of last year, there has been no YoY comparison higher than 3.0%. Again, this is similar to both Case Shiller (blue) and FHFA (red) repeat home sales indexes and the median price of new homes (gold), which are up only 0.8%, 2.0%, and 0.7% YoY:

This year the most lagging metric, inventory, has also fallen in line. In June, the YoY% change in existing home inventories was only 1.3%. By contrast, as recently as last December it was up 7.9% YoY, and in March was up 4.5% YoY:

Again, we see the exact same flatness in YoY new home inventories (blue), down -1.4%, the active listing count of homes for sale nationwide (red), up 1.9%, and the new listing count (gold), up 2.4%:

Finally, I would be reimiss if I did not show how this is all downstream of mortgage rates, which have trended sideways between 6% and 7% for almost the entirety of the last 3.5+ years:

The housing market has reached a new, suboptimal equilibrium in sales, construction, prices, and inventory. Until some new positive or negative shock occurs (like a surprise new Fed hiking regimen), expect little change in this important leading sector of the economy, which is needless to say neutral for forecasting purposes. 

Jobles claims: the “low-hire, *no*-fire” regime continues, as the “Quick and Dirty” forecast model remains positive

 

 - by New Deal democrat

Let’s take our regular weekly look at jobless claims. In addition to being 1/2 of my “quick and dirty” forecasting system (the other 1/2 being stock prices), they have a 60 year history of being a good short leading indicator. [Later this morning we’ll get existing home sales, and I’ll update an overview of the housing market then.]

This week’s update is more confirmation for the “low-hire, *no*-fire” economy that has manifested this year, as well as evidence of some return to post-pandemic residual seasonality (claims rising to midyear, then declining to year end).

For the week, initial claims declined -2,000 to 215,000, and the four week moving average declined -3,750 to 218,750. Continuing claims, with the typical one week lag, rosse 8,000 to 1.814 million:

On the YoY% basis more important for forecasting purposes, initial claims were down -5.7%, the four week average down -6.7%, and continuing claims down -7.1%:

This indicates continued expansion for the next few months.

We’re not far enough along in July to warrant updating vis-a-vis the unemployment rate, but apropos of my comment above, here is what the “quick and dirty” forecasting model looks like through this week:

Both measures are above 0. Only when both are below 0 does the system trigger a recession watch, and only when they are sustained for a significant period of time (at least a month) does it trigger a warning.

Regional Fed surveys confirm manufacturing rebound: services, not so much

 

 - by New Deal democrat

Yesterday I looked at the economically weighted ISM manufacturing and services indexes, pointing out that they have shown a rebound this year. Today let’s take a brief look at the regional Fed manufacturing and services indexes.

Below are the manufacturing and services indexes, averaged over the four Fed districts whose reports are picked up on FRED: namely, New York, Philadelphia, Texas, and Chicago [Note: for unknown reasons, FRED does not publish the Richmond and Kansas City Fed regional numbers].

Here is the average of the four regional manufacturing indexes:

Just like the ISM manufacturing survey, shown below, they showed a change from contraction to expansion late last year that has intensified this year:

Most likely this is due to the AI data center building boom (or bubble).

Now here is the average of the four regional services indexes:

Very much *unlike* the ISM services index, shown below, they have shown consistent contraction throughout the entire last 18 months:

I am inclined to go along with ISM in this case, mainly because employment in services has shown consistent growth in the monthly payrolls reports, as well as consistent increases in personal spending on services even after adjusted for inflation, and also the very strong weekly Redbook consumer spending reports, the most recent of which, for this week, continued the trend:

Weekly spending YoY was up 11.5% YoY per Redbook, another new four year high.

I am not sure why the regional Fed services indexes are not picking up on the growth that appears to be shown everywhere else.

Scenes from the June jobs report: a weak but improving economy

 

 - by New Deal democrat

There’s no important new economic news today, so let’s take a somewhat deeper dive into last Thursday’s employment report for June. To cut to the chase, this is of a piece of my “Big Picture” narrative from Friday in which I wrote that most of the signals suggest and economy coming out of a weak patch rather than going into one.

Let me start with a comparison of the typically leading manufacturing and residential construction sectors vs. services, which sometimes barely decline at all during recessions. Here is the historical look from 1982 to just before the pandemic:

Typically before a recession in a single month 100,000 jobs or more would be lost from manufacturing (red), and 10,000 or more lost from residential construction (orange), while service providing jobs (blue) would only start to decline once the recession had begun.

By contrast, as shown in the post-pandemic graph below, manufacturing’s biggest monthly decline was 60,000 in late 2024. That sector has recently shown more monthly *gains.* Residential construction’s biggest monthly decline has been less than 6,000 last August and this May. Service producing jobs have increased every month since January:

Not only have manufacturing jobs increased in recent months, but take a look at one of the 10 “official” leading indicators, average weekly hours worked in manufacturing jobs:

This metric has increased sharply in the past 24 months, and is now tied with its post-pandemic high. There has never been a case of a recession with manufacturing hours so strong.

And the YoY change in total payrolls bottomed last winter, and has increased gradually since:

Total YoY employment gains are still very weak, but the negative trendline appears to have been broken.

Next, there has been much comment about the decline in the employment-population ratio and the labor force participation rate in recent months. But a closer look at each indicates that in the prime age 25-54 year demographic (red in the graphs below), there has barely been any decline at all. First, here’s the labor force participation rate:

And here is the employment-population ratio:

This looks very much like the tail end of the large Boomer generation shuffling off into retirement and thus skewing the comparisons, rather than a generalized weakness. The sudden dropoff in June looks like noise that may be revised next month.

Finally, let me update two statistics that I cite almost constantly. First, almost every week I point out that jobless claims (blue in the graph below) have had a 60 year history of leading the unemployment rate. In the past few months, it appeared that the unemployment rate (orange in the graph below) had stalled. But when we carry the comparison out another decimal point, by disaggregating the unemployment rate into the number of people unemployed divided by the civilian labor force (red), the gradual decline this year becomes apparent:

I expect we will see a further decline in the unemployment rate (at least as decomposed) before it bottoms perhaps several months from now.

And last of all, here is the updated graph of aggregate nonsupervisory payrolls (red), together with its component parts: total hours worked in the economy (gold) and average hourly earnings (blue); compared with the inflation rate (black), all normed to 100 as of 12 months ago:

While total hours have barely budged since last November, average hourly pay has more of less kept even with monthly inflation, except for the Iran war spike. We won’t get June’s inflation number until next week, but the Cleveland fed estimates it will come in just below 0, rounding to -0.1%. Since last June rounded upward to +0.3%, the YoY inflation rate is likely to decline roughly -0.4% to 3.8%. Since aggregate nonsupervisory payrolls also declined -0.1% in June, this means that real aggregate nonsupervisory payrolls YoY will remain higher by 0.7% — very weak, but not recessionary.

The economically weighted ISM indexes for June show continued growth, equipoise in employment, and still strong inflation at the producer level

 

 - by New Deal democrat

The economically weighted ISM manufacturing + services indexes have become one of my favorite datapoints. In particular, in the past year they have been an excellent dashboard for the state of the US economy as a whole, both as a coincident and short leading indicator. Last summer they accurately suggested that the economy was very close to recession, while since the beginning of this year they have indicated improvement. 

To recapitulate, services are about 75% of the economy and goods production the remaining 25%; hence, their weighting. To reduce noise and amplify signal, for forecasting purposes I use the three month moving average of the weighted average. One caveat is that these are diffusion indexes, which tell us how widespread a trend is rather than its net value.

Last Wednesday we got the manufacturing report, which was very positive for new orders, and for the first time in many months showed that jobs were not contracting, and price increases were less widespread than before. This morning’s ISM services report was similar, in general showing a slightly weakening but still quite positive sector. [Note: in all the graphs below, the manufacturing number is in blue, and the services number in gray].

The headline services number declined -0.5 to 54.0. The three month average was unchanged at 54.0 as well. This compares with the manufacturing three month average of 53.3. Thus the weighted average is 53.8:

New orders also declined -2.2 to 55.1, and the three month average declined -1.8 to 55.3. Since the manufacturing average was 55.6, the weighted average is 55.4:

If new orders decelerated, there was more good news about employment, the index of which rose 3.3 to 51.2, returning to expansion after several months of contraction. The three month average also rose 3.0 to 50.0. Since manufacturing rose to 49.7, and its three month average was 48.2, the weighted average rose to 50.5 - the first positive number in four months:

Finally, as with manufacturing, inflationary pressures in services abated somewhat in June, as the prices paid component declined -3.6 to 67.7. The three month average declined -1.3 to 69.6 Since the three month average for manufacturing was 79.9, the economically weighted average declined -4.4 to 69.2:

Note that the above graph, unlike the first three, goes back five years to show the comparison with the post-pandemic inflationary spike.

Let’s recapitulate:

•  Both the headline and new orders components of the services index showed deceleration, but were solidly positive, as were the economically weighted manuacturing+services average.
•  The employment situation has improved from contraction to equipoise or slight gains
•  The prices component still shows widespread inflationary pressures at the producer level, but not as strong as the previous few months.

The economically weighted ISM averages indicate the economy is expanding now, and can be expected to continue expanding for at least a few more months, but that the inflationary spike primarily driven by the Iran war, but also the computer chip shortage, continues to be a serious problem.