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.

The United States of America at 250: the enemy of Republics is entrenched power

 

 - by New Deal democrat

On America’s 250th anniversary, the state of the Republic is not good.

Ten years ago, after the 2016 election, I embarked upon a reading journey, to seek an answer to the questions: are Republics fragile? Are they doomed to fail, or fall into tyranny? And so I began reading books about every Republic, ancient, medieval, and modern that I could find, covering the time period from the emergence of civilization to the present, including the city-states of ancient Greece, Rome, Venice, Genoa, Geneva, Switzerland, the Netherlands, and the emerging modern UK (and others I’ve forgotten at the moment).

And I came to a surprising answer: despite the notoriety of the fall of the Roman Republic, the fact is that republics are probably more stable than despotic or monarchic forms of government. The reason is that despotic rulers fear those around them who are *too* competent, and thus threats, and so succession falls away very quickly to incompetent and relatively easily overthrown rulers, while the competent contenders are frequently assassinated by the ruler. Similarly, monarchies seldom last more than a century without a dynastic war breaking out, in part for the same reason that by the time you get to the great-grandchildren of the founder, the competence of the monarch is very much in doubt. 

So while the *form* of despotism or monarchy might last for centuries, the direct line of succession without violent dynastic war is usually much shorter. For example, the line of succession that began with Julius Caesar only lasted until the assassination of Nero in A.D. 68, and internal to that line was the assassination of Caligula and the choice of his successor, Claudius, by the praetorian guard.

By contrast, rulers in a republic do not have to fear the competence of their likely successors; and so competent leadership tends to continue. Even the Roman Republic itself lasted 500 years, hardly a transient state. And there are other examples of long-lived republics, such as Venice (over 1000 years), the Swiss confederation (800 years and counting) and the post-Glorious Revolution UK, in which Parliament is supreme (335 years and counting). And the form of succession in most republics is by some sort of “democratic” vote. In the Roman Republic, for example, each tribe got one vote, and that vote was determined by an internal majority of each tribe. In many other republics, voting was restricted to an oligarchy or aristocracy, but leadership was chosen by that vote. Hence, in the Venetian Republic, only once in its long history was there ever an attempt at an autogolpe.

Republics have historically engendered great loyalty by their citizens, because those citizens see that their own security and chances of success are bound up in the security and success of the republic itself.

But it is only because wide groups of citizens see the chance of success that they continue to be loyal to the republic.

David Frum remarked about 20 years ago, about reactionary conservatives, that if they do not see the possibility of success in achieving their goals in the democratic process, they will not change their values, but rather jettison democracy. That observation should not be limited just to right-wingers. If any large group of citizens does not see the possibility of ever being able to enact their goals into law, they will not abandon those values or goals, but rather abandon a commitment to the process of selecting a government.

Which brings me to the crux of this piece: the enemy of Republics is entrenched power, that cannot be displaced by the voting process of that republic, even if that entrenched power has only minority support. To go back to ancient Rome again, it was the inability by the ordinary plebeians to ever displace patrician power that led them to abandon the norms and forms of that Republic’s government. 

In the US today, we see two wellsprings of entrenched power. On the one hand, we see the old evangelical WASP majority, especially in areas like the Old South that until recent decades never saw a big influx of immigration, determined not to let go of power by any means. On the other hand, we see increasingly entrenched wealth that receives ever more tax cuts every time the GOP is in power, to the point where one man now is worth 1/32nd of the entire nation’s GDP.  That entrenched wealth is never going to give up its power voluntarily. If that power cannot be displaced by a majority of the citizens of the country, if it uses every lever of power to hold on to its control, eventually the forms of the Republic will give way.

Just this past week, we saw a corrupt Supreme Court relegate Congress to the sidelines, holding that once Congress creates an agency, it no longer has any control over it. And only a few days later, we saw that 4 of the 9 justices were ready to torture even the clearest of phrases, that “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States ….” into an interpretation that is nearly the opposite of what has been believed for well over 100 years. If there is no way to overcome the fiat of the Supreme Court, if even legislation and Constitutional Amendments are not sufficient to negate such sophistry, where indeed is the “rule of law” which is the defining feature of republic, at all? If there is no President too is above the law, then what exactly is worth of the “law” itself?

Have we, to mix metaphors in this essay, already crossed the Rubicon in to an era of entrenched power that cannot be displaced by the tools available in this Republic? I have an opinion, but I leave the answer to this question to each reader.

Weekly Indicators for June 39 - July 3 at Seeking Alpha

 

 - by New Deal democrat

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

Two cross-currrents I mentioned in my long piece yesterday were very much in evidence in the high frequency data this week: huge gains in aggrgate YoY consumer spending, and very weak withholding tax collections. My take on this is that the top end of the income distribution is doing very well, thank you, while the lower levels are struggling.

A usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for my efforts.