Starting off the second half of 2026 (mainly) positive

 

 - by New Deal democrat

[Special programming note: Today we begin the second half of the year. On Friday there will be no data due to the federal holiday. Since I haven’t updated my overall nowcast and forecast for the economy, as well as how average Americans are doing economically, I plan to do so then.

Additionally, in observance of the 250th anniversary of American independence, over the weekend I plan on a Big Picture overview of what history suggests about the status of the Republic, and where it goes from here.]

In the meantime, with the beginning of the new month, we get important looks to two leading sectors of the economy; namely, manufacturing and construction. Additionally, yesterday snuck by without me taking a look at the May JOLTS report, so let me give a brief overview now.

The JOLTS Report

This report comes out one month after the jobs report, but parses the jobs market by hiring, firing, openings, and quits. With one exception, yesterday’s report showed a steady state.

Job openings (blue in the graph below) increased sharply in April, and maintained that high level in May, increasing 9,000 to 7.594 million annualized, the highest level in two years. Hires (red), on the contrary, declined -45,000 to 5.170 million, slightly below the average flat trend of the past two years. Voluntary quits (gold) increased 22,000 to 3.065 million, also slightly below its average flat trend for the past two years as well [Note; in the below graph, all three are normed to 100 as of their pre-pandemic levels]:

Most importantly, both hires and quits have been flat at about 88% of their pre-pandemic average over the past two years. Job openings have clearly increased recently, and are currently about 20% higher than their pre-pandemic level, but I regard that statistic as a “soft” one, vs. the other two.

The most significant number was the level of layoffs and discharges, which increased 41,000 to 1.708 million:

But most noteworthy is that the average level of layoffs declined sharply late last year, and with some noise, has remained at that low level, only about 85% of the already-low pre-pandemic level. This very much confirms what we have been seeing in initial jobless claims ever since 12 months ago.

In summary, the May JOLTS report shows that we have transitioned from a “low hire, low fire” economy to a “low hire, almost *no* fire” one.

ISM Manufacturing

The ISM manufacturing report is for June, the first economic report for that month. And it continued the string of positive reports we have seen here since the beginning of this year. The headline number declined -0.7 to 53.3, still expansionary:

The more leading new orders subindex declined -0.8 to 56.0, which is still strongly expansionary:

But the more important news this month was contained in two other subindexes. First, the employment subindex increased 1.1 to 49.7, virtually in equipoise for the first time in almost 18 months:

And the prices paid subindex showed a sharp deceleration in inflation pressures, down -9.1 to a still-high 73.0:

To minimize noise, I pay particular attention to the three month moving averages, especially of the headline number, which was 53.3, and the leading new orders subindex, which was 55.6.

This was a very positive report, showing expanding production which is likely to continue, a firming of employment, and while there are still inflationary pressures in the pipeline, they are less extreme than in the past few months.

Construction Spending

This report like the JOLTS report above, was also for May. It was much more of a mixed bag.

Total construction spending (blue) rose 0.1% for the month, but was lower -1.5% YoY. Spending in the important leading housing sector (red) rose 0.4%, and was 1.8% higher YoY. But since the price of construction materials (gold) rose 1.1% in the months, in real terms both headline and residential construction spending were down for the month. And since prices for construction materials were higher 5.6% YoY, both were also down YoY [Note: below graphs are normed to 100 as of just before the pandemic]:

Manufacturing construction also continued its slide, down -1.4% for the month, and down 21.9% YoY. The Boom set off by Biden’s infrastructure stimulus has clearly worn off:

The two sectors most closely associated with the AI data center Boom (or bubble) are water supply and power production. Spending for each declined -0.2% for the month. For the last 12 months, water supply construction has only increased 0.2%, and power production by 1.2%:

It may be that the bloom is coming off the rose, particularly when we adjust by the price of materials as noted above.

Finally, although I won’t bother with a graph, there are several other significant components of the headline numbers. Office construction was up 3.6% YoY, highway and street construction by 3.0%, and educational construction up 2.8%. But commercial construction was down -6.0%.

In short, nominally construction spending has increased this year, although interestingly not at all in the two subsectors most associated with AI data center construction. But in real terms, deflated by the cost of materials, all of the significant subsectors, as well as the headline, have declined.

Summary: The manufacturing sector of the economy continues its run of positive, expansionary numbers, while construction in real terms appears to be fading slightly. Meanwhile, job hiring is steady if low, while layoffs are extremely low. Overall the short leading and coincident aspects of these numbers are positive. We’ll see if that run continues in the jobs report tomorrow.

Repeat home sales continue to show almost no shelter inflation at all

 

 - by New Deal democrat

Besides affordability being of great importance for potential homebuyers, housing also forms about 1/3rd of the entire CPI. House prices are not a component of the CPI, but historically their trend has led the official component, “Owners’ Equivalent Rent,” by about 12 to 18 months. And for about the last year, I have been beating the drum that housing prices have ceased being an engine of inflation. In fact, changes in repeat home sales prices as measured by both the Case-Shiller National Index and the FHFA Purchase Only Index are at levels that with only one exception have been at levels typically only seen during or after recessions.

This month’s report for April continued that trend.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) declined once again, this month by -0.1% for the three month period ending in April, and the FHFA index (red) had the identical -0.1% decline [Note: FRED has not yet updated the Case Shiller data]:

There is something of a divergence showing in the YoY comparisons of the two national indexes, however. The Case Shiller national index increased only 0.8% YoY, slightly more than the 0.7% YoY gain last month; while the FHFA Index rose 0.3% on a YoY basis to a 2.0% increase. Either way, as the graph below shows, outside of the Great Recession’s housing bust, the 1991 recession, and briefly in 2022, these remain among the lowest readings ever:

Given the lead time between house prices and the official CPI shelter component, here is an upate on the historical comparison [Note: CPI*2.5 for scale]:

Just as in the similar episode back in 1991, the trend in house prices has been continued slow disinflation. This has been complicated by the “shelter kludge” that the Census Bureau performed last November as a result of the government shutdown. Thus I suspect the CPI shelter readings from November through March may have been artificially low, and the April and May readings of +3.3% and +3.4% may be closer to the ground truth. Nevertheless this continues to show disinflation from the 3.6% reading immediately before the shutdown. Thus I continue to believe that the repeat sales indexes point to continued slow deceleration in the shelter inflation in the CPI.

In this regard, it’s worth noting that the median price for an existing home as most recently reported by Realtor.com was only higher by 1.3% YoY, and for new single family houses as reported by the Census Bureau there was no change whatsoever [Note: Realtor.com only allows FRED to post the last year of data]:

The good news is in the real world housing is barely contributing to inflation at all. The bad news, as shown in this final graph below, is that measured by prices housing continues to be more unaffordable than at any time before the pandemic, including during the bubble of 2001-05, currently 2.6% above that peak:

And that doen’t even take into account the increase in mortgage rates from 3% right after the pandemic to over 6% now.

Re-examing the long leading indicators: the effects of fiscal and commodity price shocks

 

 - by New Deal democrat

Several weeks ago, I wrote that “after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up.” This was primarily because, while when they have been positive the economy has followed suit 12 to 24 months later, several times they have been negative with no endogenous recession occurring thereafter: once in 2018-19 (COVID being the decisive external factor), and once in 2022-23. Historically they also had a false positive in 1966.

In that post I examined the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), which were corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits; plus common measures of the yield curve, and also real retail sales per capita.

At the end of that post, I made mention of the impact of fiscal, i.e., government spending. In this post I want to take a more detailed look at the two exemplar misses: 1966 and 2022.

Here is what Prof. Moore’s four long leading indicators, plus the yield spread between the 10 year Treasury and the Fed Funds rate looked like in the 1960s, normed to 100 as of December 1965 (I’ve also inverted corporate bond yields, so that an increase shows as a negative, and recalibrated the scale of the yield curve so that an inverted curve shows below value “100”):

As you can see, in 1966 every long leading indicator turned negative with the exception of real money supply, which was flat. This was a very strong recessionary signal. And yet, among other things, neither real GDP nor employment turned down:

Additionally, while real retail sales turned negative YoY, real income less government transfers did not:

Similarly, in 2022, every indicator declined for almost the entire year. Thereafter, several turned neutral, while corporate profits rebounded beginning in 2023:

Again, this was a strong recessionary signal. But real GDP only declined slightly for one quarter at the beginning of 2022, was flat the next, and then recovered, while employment never declined at all:

In 2022-23, both real retail sales and real income less government transfers did briefly decline YoY, but not in sync:

So, what overcame these recessionary signals? It appears that two even more powerful forces were in play.

The first was a positive price shock in the form of declining producer prices. 

To put this in context, here is the long term historical look at the YoY% change in PPI for finished goods (red) vs. CPI (blue):

With the exception of 1970, the onset of every other recession since the end of World War II has featured producer prices increasing faster than consumer prices. How this affects the economy is fairly straightforward: if producer input prices cannot be passed through to consumers, corporate profits will suffer, and cutbacks in hours and employment will begin.

But especially since 2000, there have been times where PPI inflation has equalled or exceeded CPI inflation without any recession. The simple dynamic going on here has been the decline in the labor share of producer income generated:

Now let’s look at 1966. There was a surge in PPI vs. CPI during 1965-66, but thereafter the PPI index abated:

In fact, beginning in September 1966, producer prices declined -1.1% through April 1967, relieving the pressure on employers.

A similar dynamic played out in 2022-23. From July 2022 through December 2023, producer prices declined -4.7%:

Both of these were “positive” price shocks, enabling corporate profits to increase without cutbacks to employment or an ensuing recession.

The second commonality to both episodes was huge government stimulus. Once again, here is the long term historical look, in log scale:

It’s easy to see that the mid-1960s, plus the stimulus payments during the Great Recession and COVID have been the three biggest expansions in government expenditure during this entire 75 year period. 

In the 1960s, from the beginning of 1965 through the end of 1966, even accounting for inflation, there was a 25% increase in government spending per capita:

This was LBJ’s “guns and butter” spending on both the VIetnam War and Great Society domestic programs.

The COVID stimulus was even bigger, with the 2020 stimulus increasing real per capita government spending by over 80% and the 2021 stimulus by almost 70% compared with just before the pandemic:

As a result, in 2021 real spending was 15% higher than before the pandemic, while real income even without the stimulus payments was up about 4%. Although each of these declined at differing periods during 2022 and 2023, employment (gold) never caught up even to its pre-pandemic level until the middle of 2022:

In other words, there was still a huge shortfall in the number of employees needed to fulfill all the consumer spending that had been unleashed by the stimulus. 

Finally, it’s worth noting that we do have the contrary example, of a contraction in federal spending leading to a recession, in the -10% reduction in New Deal spending that took place in 1937 through to be primarily responsible for the deep recession of 1938:

Let’s put this all together: the long leading indicators have been reliable in forecasting continued expansion, but several times have suggested a recession was likely ahead, but none materialized. In each of those cases, however, the endogenous progression of the economic cycle has been overcome by both (1) a positive supply shock in the form of disinflating or even deflating commodity prices; and (2) huge government stimulus programs. 

Because we don’t have enough examples, it’s impossible to know which of these two factors was more important, or whether both were necessary. Additionally, because the former is an exogenous event and the latter is often geopolitical, it is very unlikely that they could be forecast. On the other hand, in both 1966 and 2022 the government stimulus programs were already in place, meaning they can be taken into account in long leading forecasting.

I still plan on doing some further re-examination, so stay tuned.

Weekly Indicators for June 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the most significant high frequency indicator of the week was the 10% YoY increase in consumer spending as measured by Redbook. Despite all of the chaos and own-goals emanating out of Washington, the economy is incredibly resilient - although I continue to worry that nearly the only driving force is what looks like a Bubble in construction of AI mega-scale data centers.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little lunch money for curating the data for you.

Real personal spending on durable goods rebounds from near recessionary levels, including motor vehicle purchases

 

 - by New Deal democrat

Yesterday we saw a slew of data releases, including durable and core capital goods orders, jobless claims, personal income and spending, and motor vehicle sales. I reported on all but personal spending and motor vehicle sales yesterday. Today let’s take a look at the last two.

Let me start with the same overview graph I used yesterday, showing a pronounced downturn in real income since early last year (blue) vs. a continued increase in spending (red):

As I pointed out, the difference can be explained by the decline in the personal saving rate to an extreme low:

What are consumers spending on? The order in which such spending has typically peaked in past expansions is: first, durable goods; second nondurable goods; and finally, consumer goods. As I have pointed out many times in the past, real spending on services usually continues to increase, or at least not decrease, even through recessions. So this first graph compares real spending on durable goods (red) vs. goods as a whole (gold) vs. services (blue) for the past several years:

Monthly spending on durable goods peaked at the end of 2024 and declined slightly during 2025. In the past several months it has recovered somewhat. By contrast, spending on goods as a whole continued to trend slowly higher, and spending on services has barely slowed at all.

Here is the same data shown YoY:

Durable goods spending, while volatile, has generally trended close to the 0 line in the past eight months. A historical look at YoY spending on durable goods and goods as a whole shows that, with a few exceptions (notably 1966 and 1987), when spending on durable goods is negative for longer than a month, it typically means a recession is either occurring or at least imminent:

Now let’s look at nondurable goods. Compared with durable goods, spending on nondurable goods (orange) has continued to increase throughout the last year:

On a YoY historical basis, real spending on nondurable goods has not turned negative during most recessions, but the YoY increase has slowed sharply:

In other words, sometimes spending on nondurable goods does peak prior to recessions, but sometimes the growth rate just slows down or turns flat, as shown in the two historical graphs below set in log scale:

If the signal from spending on durable goods is close to recessionary, that on nondurable goods suggests continued expansion in the immediate future.

Which brings us to motor vehicle sales, because they are the quintessential consumer durable good. In general, in the past purchases on passenger cars and pickup trucks (blue) have slowed down noisily before recessions, typically by about 10%, while purchases of heavy weight trucks (red) have slowed first and more sharply:

But just as with spending on durable goods, purchases of heavy weight trucks in particular have rebounded in the past few months:

Purchases of passenger vehicles have picked up slightly, but are within the range of noise and are generally trending sideways.

In sum, real personal spending, unlike real personal income, is not giving a clear recession signal, and if anything has rebounded slightly in the past several months, in particular for durable goods. That is also showing up in the purchases of heavy weight trucks, which tracks with the broader rebound in core capital goods spending, and the noisier uptrend in durable goods orders, as well as other manufacturing series like industrial production and the regional Fed indexes, that we have seen over the past six to eight months. Which, to reiterate, likely has very much to do with the building of massive AI data centers.