Weekly Indicators for July 20 - 24 at Seeking Alpha

 

 - by New Deal democrat

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

With the renewed warmaking in the Middle East, the price of oil and gas shot up, and interest rates across the board as well. It looks increasingly likely that the Fed will have to hike rates to fight inflation soon, maybe as early as next month.

As usual, clikcing over and reading will bring you up to the virtual moment as to all of the data on the economy, and reward me with a penny or two for collecting and organizing it for you.

June new home sales, prices, and inventory are more evidence for a subpar housing equilibrium

 

 - by New Deal democrat

In last month’s note on new home sales,  I concluded that “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.”

Earlier this month, I described the housing market as being in a subpar equilibrium, with sales, construction, prices, and finall inventory moving more or less sideways - but at a level of building not nearly enough to meet the needs of the millions of mainly younger potential buyers who are unable to move out of apartments or maybe even their parents’ home.

This morning’s new home sales report for June was yet more evidence for both of the above theses. Sales, prices, and inventory all generally stayed on their recent trend level.

First, sales increased 10,000 on a seasonally adjusted basis to 628,000 annualized. Because new home sales, while perhaps the most leading metric in the housing market, are very volatile and sharply revised, below I also show the much more stable, if slightly less leading, single family permits (red, right scale):

Single family permits have been stable for a year. Meanwhile single family home sales have downshifted slightly (by about 5%) this year. In June sales were down -5.6% YoY.

The dynamic is similar in median prices, which declined -$13,700 to $398,300 on a non-seasonally adjusted basis:

This continues the very slow declining trend in new home prices ever since 2022, down -2.7% YoY in June. By contrast, repeat existing home sales as typified by the FHFA index (red, right scale) have continued to rise at a very slow pace (currently up less than 2% YoY). The difference is because builders of new homes have been able to cut lot sizes, square footage, and amenities to make their homes more affordable to potential buyers, whereas those selling their existing homes obviously cannot. Since, as noted above, this series is not seasonally adjusted, here’s the YoY comparison:

Finally, inventory has also stabilized, down only -1,000 in June. This has been almost completely stable since last September:

For the past few years, I’ve been repeating that prices follow sales, and inventory follows prices. Inventory has historically been the last shoe to drop before a recession; but as shown in the below historical graph, only once in the past 60 years has a period of stability about this long been shortly followed by a recession, in 1991 - and in that case, inventory declined again for several months before the recession:

Otherwise, a bottoming in inventory is something we typically see towards or even after the end of a recession.

 So, to sum up and repeat: unless inventory turns back down, it is not forecasting a recession. With sales relatively stable and prices slowly deflating, the new home market is meeting the existing home market in a equilibrium, which is likely to remain unless something significant happens upstream, like an increase in mortgage rates back to 7%, possibly driven by a Fed rate hike. 

The “no fire” economy sets a new, 55+ year record low

 

 - by New Deal democrat

[Administrative note: yesterday’s problem, in which the platform would not allow me add a new post, seems to have spontaneously resolved, although “officially” the blog metrics show “0 posts” in all its history, Cross your fingers that this issue has gone away permanently.]

I discussed the stock market’s very positive performance earlier this week. This morning’s update to jobless claims means the second half of my “quick and dirty” economic forecasting tool is also positive in the extreme.

To wit: only 187,000 new jobless claims were made last week. If this level holds up in revisions next week, it will be the lowest since 1969. In fact, only about 20 weeks in 1968 and 1969 were lower in this series’ entire history. And remember, in the 1960s, the US population was only about half of what it is now.

The four week moving average also declined sharply to 207,500, and continuing claims, with the typical one week delay, declined under 1.8 million again, to 1.796 million:

And the YoY% changes more important for forecasting purposes came in very positive as well, with initial claims down 14.2%, the four week average down -7.6%, and continuing claims down -7.5%:

We’re far enough along in the month now to see what that suggests about the unemployment rate going forward. Unsurprisingly, it adds to the evidence that the unemployment rate is likely to move even lower from its last 4.2% reading:

Geopolitical events, driven by the ramshackle chaos emanating from Washington could upend all of this, but endogenously the economy in the aggregate is in surprisingly good shape.

Regional Fed reports indicate elevated inflation is likely to continue

 

 - by New Deal democrat

[Note: Blogger has (hopefully) temporarily prevented me from putting up new posts. So if you scroll down to last weekend, I’ve amended my “Weekly Indicators” update with the new post I had planned for today. Cross your fingers that this goes away by tomorrow]

In It appears that both producer and consumer inflation are going to continue at elevated levels, despite the actual *de*flation in June.

Here’s a look at the average of the New York and Philadelphia Fed’s prices paid (blue) and prices received (orange) diffusion manufacturing indexes: 

In July, the average for prices paid decelerated from 57.1 to 53.1, while that for prices received accelerated from 26.1 to 29.3. Keeping in mind that 0.0 is the equilibrium point, these are both very elevated numbers, although - like last week’s PPI vs. CPI numbers - they indicate that producers are not able to pass on all of their upstream price increases, meaning pressure on profit margins.

Here’s what the prices paid average (/4 for scale) looks like compared with commodity prices YoY:

While the correlation isn’t perfect, especially last year, it is usually pretty close, e.g., an increase in the prices paid average correlates very well with a YoY% increase in commodity inputs.

Similarly, the prices paid average (/8 for scale) correlates well with the YoY% change in the final demand prices for producer goods (yellow) and in a more muted way with consumer prices YoY (violet):

That translates into a possible 0.5% advance in producer prices for July, and a 0.2% or 0.3% advance in consumer prices, in order to maintain the YoY averages of 6.7% and 3.5% respectively.

If both the prices paid and prices received components of the regional Fed reports suggest that elevated inflation levels continue to be likely, the collapse of the fragile “cease fire” in the Persian Gulf region has caused oil prices to increase to over $80/barrel again, and more importantly, average gas prices at the pump to go back over $4/gallon:

I do not see any real abating of inflation at any point in the immediate future, and further, it will put more pressure on the Fed to defy the Administration’s wishes, and raise interest rates.

The manufacturing sector of the economy continued to improve in June

 

 - by New Deal democrat

There’s a brief hiatus from new data early this week, so let me briefly look at the manufacturing economy, for which industrial production was reported on Friday.

To briefly recap my overall position: despite the chaos coming out of Washington, the economy has been on a moderate rebound this year, albeit with inflationary problems in part still due to tariffs and in part due to the continued closure of the Strait of Hormuz. Meanwhile the AI Boom (or, more likely, bubble) in the building of data centers has been powering stock market gains, which in turn are powering “wealth effect” spending by the upper income tier. If either or both of those trends reverse, we’re in trouble. But they haven’t stumbled, yet.

And manufacturing continued to improve in June, according to the report. While manufacturing production (red) was unchanged, gas and electric utility production (most closely tied to the data center Boom, gold, right scale) increased 0.4%, leading the total figure (blue) to increase 0.1% to a new post-pandemic record:

On a YoY basis, manufacturing production was up 1.1%, while utility production was up 2.8% - again showing the strong influence of data center building. Total industrial production was also up 1.1%:

Interestingly, the YoY change in utility production suggests that the Boom in data center construction may be abating somewhat.

This is similar to what we see in the average of the New York and Philadelphia Fed headline manufacturing indexes (blue) and new orders component (red):

Both of these are at 4+ year highs, suggesting that the improvement in manufacturing that we started to see late last year is continuing.