Is real consumer spending still a short leading indicator in a milieu of financial leverage?

 

 - by New Deal democrat

An issue came up on another site about whether my statement that “coincident indicators … [are] almost all positive, driven by a sharp increase in consumer spending” is correct, if that increased consumer spending is driven by increased leverage.

Rather than respond with a brief comment elsewhere, let me take an extended look at the data here.

For starters, let me show you the metric, of the weekly change in YoY retail spending as reported by Redbook:

Nominally consumer spending was higher by about 4%-6% in 2024 and the first half of 2025. Since then it has risen as high as 11% YoY, and as of this morning was reported to be 8.5% higher YoY.

I have written for almost two decades that real retail sales are a short leading indicator for employment, which is one of the primary determinants used to define if the economy is in a recession or not. But what if an important sector of the economy, like the stock market, is driven by leverage or speculation? Unfortunately we don’t have information about consumer spending in 1929, which was the ultimate example of a bursting bubble driving a downturn. All we know is that it was a unique situation where the economy actually entered a recession first, in June, while the stock market famously did not peak until September.

But we do have two recent examples of bursting bubbles being associated with recessions: the dotcom bust of 2000-02, and the housing bubble crash of 2006-10. So let’s take a look at consumer spending, employment, and the stock market for both of those.

First of all, as per my statement above, real consumer spending as measured by real retail sales (blue) turned neutral for a year before both downturns, while employment (red) continued to rise, peaking - almost by definition - in the month the recessions began:

On a YoY% basis, the leading nature of consumer spending compared with employment is even clearer, with spending turning negative several months before employment did (and also rebounding months ahead of the employment rebound as well):

But since the issue has come up as to the wealth effect from stock market leverage, let’s look at that as well. Unfortunately FRED doesn’t have the right to post the S&P data back further than 10 years, it does have NASDAQ data all the way back to the 1970s. So first, here are real retail spending compared with the absolute values of the NASDAQ composite (violet):

In 2000 the NASDAQ continued to rise for several months after consumer spending plateaued, and in 2007 it rose for an entire year after the real spending turned flat.

Again, the YoY% comparison shows even better that real retail spending began to decelerate sharply and even turn down before the stock market did:

So, what about the present situation? Over the past 5 years, in absolute terms there isn’t such a neat fit:

But the situation was somewhat unique, in that there was a huge stimulus in 2021, leading consumers to buy lots of stuff; and having done so, they didn’t need to do it again in 2022 or 2023. But employment had been so depressed that it took several years to catch up.

The YoY% comparison again is a little better. We can see that YoY retail sales declined, leading a gradual deceleration in hiring. And real retail sales bottomed at the end of last year, several months before the YoY bottom in employment:

In absolute terms, the stock market led the way higher in 2023 before sales picked up substantially in 2024:

The same is the case in the YoY comparison, suggesting that indeed it has been the wealth effect from stock market gains that have led to the recent increase in real spending:

But as of the last report for July, real consumer spending was higher by 1.5% YoY, consistent with the levels of an ongoing expansion as shown in the graphs for 1998-2010. And the Redbook graph I showed above indicates that this level continues to be the case for August and so far this month as well.

Finally, a point I almost always make in the context of the monthly personal income and spending report is that consumers tend to get further out over their skis, in the form of a decrease in the personal saving rate (i.e., they save less of their paychecks) as expansions go on. They typically pull in their horns (this is *exactly* Keynes’s paradox of thrift) a few months before the onset of the recession:

The exceptions were the sudden 1973-4 oil embargo, and COVID, which are basically self-explanatory. The point is that increasing leverage as expansions go on and consumers get more complacent is not unusual at all.

So to conclude: yes, the strong consumer spending that we have been seeing right up until the present is not just a sign that on a coincident basis the economy has been expanding, but a short leading indicator suggesting that - barring a particularly egregious geopolitical act of lunacy by the current Administration - the economy will continue to expand for at least a few more months.

Iran and its allies are slitting the throat of US reliance on Mideast oil; here’s a path for individual and US energy independence

 

 - by New Deal democrat

This week, like last week, starts out with a few days of no meaningful economic data. But there is still much to talk about. So let me spend a little time talking about the disastrous Iran war and the tiny silver lining of energy independence which is likely (after much pain) to finally result.

First of all, it appears that Iran is benefitting from Chinese tech and Russian targeting. Apparently another US military base in the Mideast, this time in Jordan, has been seriously damaged, including destruction of some fighter jets (none of which the current Administration wants to tell the American people about.

Just as importantly, the other side has learned some lessons from Ukraine’s use of drones and ballistic missiles to identify chokepoints and inflict maximum economic damage. In particular, within the past week Iran’s Houthi allies have obtained another choke point at the southern end of the Red Sea, and - aided by pinpoint targeting - have put Saudi Arabia’s east/west pipeline designed to circumvent the Strait of Hormuz out of commission. The Saudis have indicated it will be back up and running in a few weeks, but of course I hear that Iran has more missiles as well. Anyway, as a result, Gulf Oil has all but been shut off:

This is reminiscent, by the way, of the Ottomans’ strategy of “slitting the throat” of Constantinople by cutting off the ability to ship through the Bosporus. Hence, the title of this piece.

Meanwhile the US strategic oil reserve is at its lowest level since 1982:

Oil prices are back over $100/barrel and are close to their Iran war high:

And retail gas prices are back over $4/gallon. While diesel prices, which affect all the trucks which bring consumers all their goods, hit an all time high of $6/gallon last week:

While I don’t pretend to have a crystal ball about what might happen in future months, the current US Administration is going to remain in power, and just as incompetent, for the next two years as it has been for nearly the last two.

Fortunately, there are a number of things that homeowners in particular can do to all but eliminate their gas and oil consumption, and large efficiency gains have been made in almost all of them. So here are some options:

1. Install rooftop solar:

While this doesn’t work everywhere, and some HOA’s have rules limiting its use (which should be overruled legislatively), modern solar panels are much more efficient and much less expensive than those of even 10 years ago. An average rooftop installation can cost between $20,000-$30,000, but has a lifespan of up to 25 years, and savings pays back its installation costs within about 10 years. In the meantime, use of rooftop solar all but eliminates electricity bills, which average only $10-$30/month.

2. Consider small windmills as a supplement:

There’s a reason windmills haven’t been installed as much as solar. While installation costs can also run into the $1,000’s and even be over $10,000, the electricity generated is typically much less than solar sytems, and is more intermittent. Also they need to be installed high enough above the ground or rooftop to take advantage of the wind. But for areas that typically see wind speeds over 5mph, they can be a useful supplement. And they aren’t huge: the typical wingspan is on the order of 5-6 feet.

3. Install a modern heat pump. The knock on heat pumps used to be that they did not work in cold conditions lower than about 35°F, making them a poor alternative in areas with cold winters. But modern heat pumps are much more efficient, capable of pulling heat out of outdoor air as cold as 5°F, and in some cases even lower. Further, most can be installed without ripping out existing HVAC ductwork and make use of some existing HVAC hardware. Obviously installation costs vary greatly, but the average is about $10,000. The time it takes for the system to pay back installation costs also varies, but is typically on the order of 5 to 10 years. Again, the system can easily last 15 to 25 years, so it is still a net positive.

4. Consider an PHEV if not an EV. Plug-in hybrids have several advantages. They are full-fledged EV’s for typical daily in-town driving, and hybrids for longer trips. Further, they can fully charge overnight on a regular 120 volt line, so there is no need to expensive installation of higher voltage lines. And most hotels now have charging stations in their parking lots, obviating any problem with recharging on long trips.

One thing to keep in mind is that auto dealers are not idiots and are aware of this as well. Thus the price for used EVs and PHEVs were bid up at the Mannheim Auto Auction earlier this year, and can be expected to rise again:

 (h/t Wolf Street)

All of the above ideas come with substantial costs, although in the long term they are net positives. And if there is ever an outright shortage of gas or oil, as there was several times in the 1970s, the homeowner or driver who has converted to alternate systems won’t particularly care.

Finally, there are several things to consider pushing any subsequent Democratic Administration in 2029  (should we be so lucky) to undertake.

1. Mandate that vehicle fleets be fully hybrid or electric in 2 years, and PHEV or EV in 4 years. This is similar to the mileage targets that were set for motor vehicles beginning in the 1970s after the first oil shocks. Congress by law established minimum requirements, which were technologically achievable, and then let the automakers set their own courses to achieve them. The point of any new Congressional target should be to all but eliminate reliance on gas as a fuel for vehicles.

2. Treat the interstate transmission of electricity the same as interstate transmission of gas. When an energy company wants to run a new interstate line, States in the right of way do not have veto power. One federal approval is enough. By contrast, transmission from, say, the sunny Southwest or the windy High Plains or mountain States to population centers several States away requires approval from each State along the path - which is almost impossible to obtain, and has derailed many plans for much more energy efficient sources of electricity. 

Both of the above enactments should have sunset dates of January 20, 2033, both to encourage quick construction and to present any subsequent GOP Administration from either derailing the plans or corruptly rejiggering them. 

Unfortunately, for the next 2+ years, we are on our own; but as I have described above, there are actions that individuals can take. And as I’ve read somewhere, when panic is appropriate, the first person to panic has the most advantage.

Weekly Indicators for September 7 - 11 at Seeking Alpha

 

 - by New Deal democrat

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

The story of this past week is the same story of the several preceding weeks; namely, increased interest rates across the board, driven by all of the inflationary “policies” of the current Administration, most especially its increasingly disastrous war, are turning more of the financial indicators negative.

Against this we continue to see AI data center construction-driven gains in several short leading indicators and in particular consumer spending.

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

August core inflation benign, but energy related prices make all the difference for headline

 

 - by New Deal democrat

After benign June and July consumer inflation due mainly to the temporary decline in energy prices, August inflation returned to its recent trend. On a monthly basis prices (blue) rose 0.4%, although on a YoY% basis, August equaled July’s 3.4%. But perhaps more importantly, core CPI excluding food and energy (red) rose 0.3%, and made a new post-pandemic YoY% low of 2.4%. Excluding shelter (gold), CPI rose 0.3%, but worryingly increased 3.6% YoY:

While I’ll go into more detail below, the good news on “core” inflation was mainly about a number of recent “problem children,” like transportation services and medical care, being somnolent, more than anything else. 

 But let’s start with shelter, which is 1/3rd of the entire index. It continued its deceleration, up 0.3% for the month, but up “only” 3.0% YoY (blue).  Of it’s two components, Owner’s equivalent rent rose 0.2% monthly and 3.1% YoY, tying its post-pandemic low, while actual rent of primary residence also rose 0.2% in August but was only up 2.7% YoY, the second lowest YoY advance since the pandemic:

As I indicated above, with the exception of a few salient smaller purchases like coffee, or dental care, almost no sector of purchases exceeded 4% YoY. One portion of the former problem child of transportation services, to wit motor vehicles repairs and maintenance, did continue to rise, up 1.1% in August and up 5.2% YoY; but motor vehicle insurance has also become well-behaved. So I won’t bother with graphs.

Another former problem child, motor vehicles, remained sleepy. New vehicles (red) rose 0.3% for the month, but were only higher 0.6% YoY, while used vehicles (gold) rose 0.4% for the month, but were lower in price YoY by -2.3%. The average for all motor vehicles (blue) was higher 0.3% monthly, and *down* -0.5% YoY:

But if shelter was only slightly elevated, vehicles actually experienced deflation, and the rest of core categories were generally well-behaved, that was absolutely not the case for energy or energy services. 

In the broad category of energy, prices in August rose 2.1%, and 16.3% YoY. Gas and oil rose 4.2% for the month, and were up 28.0% YoY:

Meanwhile, the AI data center related categories of electricity and utility services showed an actual decline of -0.4% monthly, but remained up 4.0% YoY%: 

Additionally, computer software and accessories rose 3.8% (!) for the month and are up 8.4% YoY:

Before I conclude, let’s update real nonsupervisory hourly wages (orange), which declined -0.1%  for the month and remain down less than -0.1% YoY; and real aggregate nonsupervisory payrolls (red), which rose 0.1% for the month and are up 1.0% YoY, although both remain about -0.5% and -0.1% below their February and January peaks respectively:

Recall that real aggregate nonsupervisory wages are an excellent short leading indicators for recession. The current situation is almost sui generis. On the one hand, it is very rare for this metric to stay below peak for more than half a year without a recession occurring shortly thereafter. On the other hand, a good coincident marker for the onset of recession is when they turn negative YoY, and in that regard they actually improved this month:

On final very big caveat. This data does not include the big increase in the price of gas and oil we have seen in the last few weeks. With the situation in the Strait of Hormuz becoming chronic, and the strategic oil reserve close to empty for all practical purposes, this statistic could well be underwater by the end of this year.

The same suboptimal stagnant existing homes market continued in August

 

 - by New Deal democrat

For the last three years, the market for existing homes has been rangebound. While there may be some slightly upward pressure on prices, with the background financial fundamentals the same, the existing home market has reached a suboptimal equilibrium, with something like a -500,000 decline in housing inventory available compared with ten years ago; and rangebound sales as well.

That continued to be the case in August. Existing home sales declined a seasonally adjusted -2.0% monthly to 3.98 million annualized. Which continues to be well within its range of between 3.85 - 4.30 annualized for the past three+ years:

Historically prices follow sales, and so with rangebound sales, prices on a YoY basis have been relatively calm as well. These are not seasonally adjusted, so we look at them YoY. And since February of last year, there has been no YoY comparison higher than 3.0%. in August the YoY comparison was +1.9%:

This year the most lagging metric, inventory, has also fallen in line. In August, the YoY% change in existing home inventories was -0.6%. By contrast, as recently as last December it was up 7.9% YoY, and in March was up 4.5% YoY:

For the last two months, I have introduced my look at the existing home sales report as follows: “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.” That suboptimal static equilibrium continued again in August.

Continued very low jobless claims, and a note about vulnerability to a stock market shock

 

 - by New Deal democrat

With other news (finally!) out today, let’s take at least a brief look at jobless claims.

Initial claims declined -1,000 to 206,000, while the four week moving average declined -1,500 to 205,000. With the typical one week delay, continuing claims declined -1,000 as well to 1.774 million. These all continue to be extremely low numbers, close to the low end of the entire 60 year series:

I’ll dispense with the graph this week, but the more important YoY% changes are pretty dramatic, as they are in comparison to a Labor Day spike last year. Initial claims were down -21.5%, the four week moving average down -15,9%, and continuing claims down -7.9%.

Jobless claims, along with stock prices, compose my “quick and dirty” forecasting tool. With stock prices still up over 15% YoY, they continue to suggest a solid expansion over the next few months (oil price shock permitting). [Note: There is an issue with FRED updates today. If and when the information is posted there, I will update here]

Aside from the fallout from the Iran war, the one big thing that concerns me is just how much of consumer spending - which, again, is about 70% of the economy - has been dependent on the wealth effect from stock market gains this year. To the best of my knowledge, this is the first time since the Roaring ‘20’s of 100 years ago that so much spending has been downstream of the stock market. While I am absolutely *not* forecasting any sort of similar crash, the fact is that this dependency creates a very real possibility of a stock market downturn feeding on itself via the effect it would have on consumer spending.