Manufacturing expands in May; April construction expands nominally, but only data center construction in real terms

 

 - by New Deal democrat

May data started out as usual with the ISM manufacturing index. Plus, as a bonus, official government data is finally back on schedule, only 7 months after the end of the shutdown! By which I mean to say, April construction spending was also released, on time.

To cut to the chase, the news about manufacturing was both good and bad, while that on construction was ‘meh.’

Let’s start with manufacturing first. Late last year, I began to notice that the headline regional Fed and ISM numbers were trending “less bad,” and then finally outright positive. That trend continued this month, as the headline ISM manufacturing  number (blue in the graph below) increased 1.3 to 54.0 (recall that any number above 50.0 indicates expansion). The more leading new orders subindex (gray) also rose, by 2.7, to 56.8 suggesting the AI data center related Boom will continue. The three month averages, which smooth out a little volatility, rose 2.2 to 54.8 and 0.2 to 54.7, respectively:

As I have said a number of times recently, I am convinced that all of the activity surrounding AI data center construction and operation, and the affluent consumer spending secondary to the (narrow) stock market Boom associated with it are the only things keeping the US economy from being in recession at present.

That was the good news. As with last month, here’s the bad news. First, the contraction in goods producing employment continued, although it was “less bad” at 48.6 vs. 46.4 in March. The three month average is 48.3, also “less bad” than for all of last year:

This, by the way, is at variance with the official employment report as to goods-producing employment, which has been generally increasing since last October, and specificially, manufacturing employment, which has been increasing since last December. The most likely way for the two numbers to be consistent, since the ISM report is a diffusion index,  is if the gains in employment are narrowly focused, but stronger than a more diffuse weakening.

But the worst news is that there continue to be widespread increases in prices paid. This did decline in April, by -2.5, but the decline was to “only” 82.1. The three month average is 81.7. The graph I show below goes back five year to show that price increases are as widespread now as they were during the worst of the post-pandemic inflation:

As I indicated last month, this is a very sharp inflationary pulse, which is going to pass right through into consumer prices for goods.

Now let’s turn to the second report, for construction spending. 

in the past I have used construction to help track the long leading sector of housing; and in the wake of the Inflation Reduction Act, plus “Liberation Day,” it has also been useful to track manufacturing. But now, via tracking construction of water supply and power, it is also a useful proxy for construction of AI data centers.

In April on a nominal basis total construction spending rose 0.4%, but that was neutered by a -0.4% reduction in March. On a YoY basis, it was up only 0.7%. Residential construction spending rose 0.8%, and up 1.7% YoY. On a longer basis going back several years spending has been generally flat:

The problem with this nominally positive news is that the prices of construction materials rose 1.3% in April alone, and are up 6.7% YoY, meaning that in real terms both headline and residential construction spending was negative; in fact, the worst in nearly three years:

On the other hand, even nominally manufacturing construction continued its slide, down -1.2% for the month and -18.5% YoY (so much for tariffs bringing manufacturing back onshore!):

Finally, as indicated above, spending on power and water supply construction appear to be the best proxies for AI data center related spending. In April, power supply spending rose 0.6%, and it is up 6.8% YoY; while spending on water supply construction declined -0.5%, and is up 4.8% YoY - but is down 5% from its peak last October. Note that in the graph below I norm both to 100 as of the start of the pandemic, to show that power generation construction has increased nearly 40%, and water supply construction spending at its peak had almost doubled:

Although I won’t show the graph, adjusted by inflation in construction materials, only power supply construction spending is higher YoY.

Let’s put this all together. In the long leading sector of housing, spending is higher, but appears really to be related to the cost of materials. In the short leading sector of manufacturing, business is increasing, but spending on new manufacturing plants has been plummeting. The one sector of construction that appears to be truly increasing is power supply construction for AI data centers. And the strong inflationary pulse is continuing.

Weekly Indicators for May 25 - 29 at Seeking Alpha

 

 - by New Deal democrat

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

The split between the portion of the economy being driven by AI-related production and profits and the broad consumer economy continues to stand out starkly. But as I have pointed out often in the past many months, there is no sign as of yet that the consumer is putting down their credit card and pulling in their horns.

As usual, clicking over and reading will bring you up to the virtual moment as to the broad state of the economy, and reward me a little bit for collecting and organizing all of the data for you.

April new home sales: prices somnolent, an interesting wrinkle in inventory

 

 - by New Deal democrat

The final note from yesterday’s data is concerning new home sales, and more importantly at the moment, prices.

As a general refresher, new home sales are perhaps the most leading of all housing data; but they are very volatile and heavily revised, which is why I pay more attention to single family permits. But averaged over three months, most of the noise goes away.

Normally I start with the sales numbers, but at present I am most interested in what is happening with house prices. The data for new homes is not seasonally adjusted, so the better metric is the YoY% change. On a YoY basis, those were up 2.2% through April (orange) (absolute prices shown in blue, right scale):

The three month moving average remained negative (quarterly average shown in red), at -1.3%, well within the range over the past three years. Indeed, from the same three month period three years ago, prices are down -4.9%.

Compare this with existing home sales, where the median price through April was up 0.9%, 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.

So the bottom line is that all of the measures of median home prices that we have indicate that house price inflation is somnolent.

Now let me turn to sales, which are seasonally adjusted. These declined -41,000 to 622,000 annualized. All four month so far this year have shown sales at or near the bottom of their range for the past three years. This is a negative long leading indicator, but one that I will need to see validated by single family permits (red) in the next several months:

Perhaps more importantly at present, as opposed to new single family homes *sold*, the inventory of new single family homes *for sale* is typically one of the last shoes to drop before a recession actually begins. In April, inventory increased 8.000 to 489,000. After decreasing since last March, Inventory (red in the graph below) has been increasing so far this year:

This is probably because, until the Iran war, mortgage rates were decreasing and builders expected there to be more demand for spec houses. Since mortgage rates have since increased, builders were probably caught somewhat flatfooted.

The only other time such a turnaround happened was during the tech boom of the 1990s. After declining into 1998, housing inventory increased again until early 2000. Then it decreased again in the next year until the recession:

Not exactly the same scenario, but it suggests that a recession will not be signaled by this metric until iinventory turns down again.

The producer part of the economy is doing just fine, thank you

 

 - by New Deal democrat

Per my comments yesterday, so much data was released (with none coming today) that I did not report on several of the items. I’ll get to new home sales later, but first let’s talk about new orders and revised GDP.

The central theme of yesterday’s personal income and spending report was that real incomes have fallen significantly since last September, such that typically by now we would be in a consumer-led recession. That hasn’t happened (yet!) in part because consumers are digging into their savings and running up credit card debt to deal with the shortfall. The other part is because the producer part of the economy is booming (or bubbling) on the back of massive AI-related spending.

So let me start with my last graph from yesterday, of real manufacturing and trade sales through March, which declined -0.3% from their all time high in February:

After a post-tariff pause last year, real sales have resumed their strong upward trend this year.

And there is every sign that the trend is going to continue at least for a few more months, because the short leading indicator of durable goods new orders increased a whopping 7.9% in April alone, and the second biggest monthly gain since the pandemic, to a new all-time high. Although core capital goods orders did decline-0.8% for the month, it was only eclipsed by March’s all time high as well:

And beyond that, yesterday’s second report on Q1 GDP included corporate profits, a long leading indicator. Excluding inventories and capital consumption, real inflation adjusted profits increased 3.3% in Q1, although including those adjustments they declined -0.4%:

But on a YoY basis, either way they were higher by over 10%:

Typically real corporate profits peak one year or more before a recession. 

In summary, if consumers are teetering on the cusp of a recessonary contraction, producers are doing just fine, thank you.  For now, anyway.

April personal income and spending: the consumer is teetering on the very edge of recession

 

 - by New Deal democrat

This morning’s personal income and spending report for April showed us a consumer who is teetering on the very edge of recession, while the production side of the economy continued its elevated AI-related growth. 

To repeat my usual introduction, personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.

In April, nominally personal spending rose 0.5%, while personal income was unchanged. Since the PCE deflator increased 0.4%, however, spending was only higher by 0.1%, while real income declined by -0.4%, the third decline in a row and the fifth decline in the past seven months, taking the absolute number down to its lowest since February of last year:

Further, on a YoY% basis, real spending was up 2.1%, the lowest such comparion in over two years except for last December. But worse,  real income actually declined -1.2% YoY:

Importantly, the long term historical graph of real income YoY shows that outside of comparisons with stimulus or tax law change months, real income has only been negative YoY during or in the immediate aftermath of recessions:

Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions — real personal income also declined -0.4% to its lowest level since late 2024, and -1.2% below its peak level last September:

Outside of brief declines of no longer than four months, and during 2022, a -1% or greater decline from a peak has only happened leading up to or during recessions (note log scale for better clarity):

And 2022 can be distinguished by a gale force economic tailwind of close to a -10% decline in most commodities as the COVID bottlenecks unraveled, which needless to say is nowhere to be found at present. 

Another important component of the data is spending on goods, and in particular durable goods, which is a leading indicator. Historically, the pattern has been that real spending on goods (gold in the graph below) turns down in advance of recessions, and in particular spending on durable goods (red), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. 

These have already been flashing red warning signals for a number of months. In April, real spending on services rose 0.2%, but real spending on goods declined -0.1%, and on durable goods declined -0.6%. The below graph shows the post-pandemic record, normed to 100 as of March of last year:

On a YoY basis real spending on goods was up 1.2% but real spending on durable goods was down -0.1%. The trend has been weakening for over a year, and for the past few months has been the lowest since 2022:

A longer term graph of the same shows that such weak numbers only happened during the Great Recession and also in early 2019, which was close to a recession as well:

The Iran war showed up in PCE inflation, as the deflator increased 0.4%, causing YoY PCE inflation to rise to 3.8%, the highest since May of 2023:

Meanwhile, the personal saving rate - i.e., the portion of income left over after spending, declined a sharp -0.6% to 2.6%, the lowest such rate since June 2022, which has only been exceeded during the 2005-07 period and during 2022:

This is the second month in a row in which it appears that, in order to deal with the spike in gas prices, consumes got further out over their skis, leaving them vulnerable to any further shock. Typically sharp retrenching by consumers as demonstrated by an increase in the saving rate is something that happens just before the start of a recession.

Finally, the updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These declined -0.3% in March from their all-time high in February:

This is of a piece with the recent rebound in manufacturing data we have seen in things like durable and capital goods orders as well as manufacturing production, which in turn is tied to AI data center construction.

To sum up, April’s personal income and spending report amplified two very big trends which have been apparent in this data since late last year. First, the average consumer is only keeping their proverbial head above water by digging into their credit limits, as their real income has declined by recessionary margins. This is also manifesting by a decline in spending on goods, and especially durable goods. 

There are only two things keeping this from having brought about a recession already. The first is that consumers have not yet started to retrench by increasing savings. Second, the AI data center construction boom (or bubble), likely also aided by oil company profits, is driving an increase in manufacturing production.

By such a narrow thread is the entire economy hanging.

Jobless claims continue to forecast economic growth and a tight labor market

 

 - by New Deal democrat

This morning there is a slew of economic data, including personal indome and spending, jobless claims, durable and capital goods orders, revisions to GDP, and new home sales. Since tomorrow there is very little data, I am going to report on the first two tdoay, and save the rest for tomorrow.

Let me start with my usual weekly report on jobless claims. As per usual, I do this because historically they have been a very good short leading indicator.

Last week initial claims rose 5,000 to 215,000, and the four week moving average rose 6,250 to 209,000. Both of these continue to be excellent numbers from the historical perspective. Continuing claims rose 15,000 to 1.786 million:

As usual, the YoY% changes are more important for forecasting purposes, and all of these were negative comparisons (which means very positive for the economy). Initial claims were down -8.9%, the four week average down -8.6%, and continuing claims down -6.8%:

Based on long term historical data, these portend continuing economic growth in the next few months. There is an important caveat, which is that the historically low jobless claims numbers are consistent with historically low working age population growth, fueled in large part by a virtual halt to immigration. In particular, it is probably not a coincidence that the YoY negative comparisons began last July and have intensified since. While Los Illegales cannot make unemployment claims, legal immigrants can but may be afraid of ICE targeting them anyway (because ICE has certainly been detaining and even deporting legal immigrants). Additionally, if an employer’s undocumented workforce has dried up, then it will take a lot more slack in the jobs queue before the employer begins to lay off remaining workers.

Finally, since jobless claims lead the unemployment rate, let’s do our update of that comparison:

The big slide in the monthly averages of both initial and continuing jobless claims forecast a similar decline in the unemployment rate in the next few months, not just to 4.0%, but possibly even lower.

The bottom line is that the employment sector of the economy (if not necessarily the income earned) is doing quite well.

Why no US recession? Free spending by the upper class

 

 - by New Deal democrat

There is a slew of economic data being released tomorrow, the most important of which will be personal income and spending, so I will likely defer some reporting on the other data until Friday.

But in the meantime, there’s no significant data today. So let me take this opportunity to show in the simplest terms why all of the economic chaos coming out of Washington, including Tariff-palooza, mass deportations, the Big Billionaire Bust-out Bill, and the gas price spike and all of the other disruptions arising from the war with Iran have not put the US economy into recession as of now.

First, here are stock prices for the last year:

One year ago, the S&P 500 was about 5900. Yesterday it closed at 7519.12, about a 27% increase in that one year period. That is an absolutely booming (or bubbly!) stock market, driven mainly by AI-related companies.

It is estimated that the top 10% of the wealth distribution owns about 90% of all stocks. The top 10% by income own about 70%.

 

By contrast, both personal income and average nonsupervisory earnings have grown about 3.7% YoY as of their respective latest readings:

This vs. the latest YoY growth of 3.8% in the CPI.

So while the lower parts of the income distribution are struggling, the uppermost elements are doing just fine, thank you.

And they are spending.

Here is the last three years’ of YoY weekly retail spending by Redbook. As of this week it showed a 9% YoY increase:

Not only has spending been positive YoY, but there has been a marked acceleration in that YoY spending beginning last autumn and accelerating even more this spring.

One of the very first things we could expect consumers to cut is the cost of dining out. That hasn’t been happening either:

Typically in 2024 and 2025, YoY growth in dining reservations was about 6%-8%. In the past 12 months it has accelerated to over 10% gains YoY.

So why isn’t the US in recession? Because gains by the uppermost in the income and wealth distribution have enabled such free spending that it has more than overbalanced the struggles of most of the rest.