Tuesday, July 23, 2024

Existing home market inventory and prices move slowly towards normalization, while sales remain punk


 - by New Deal democrat

Since existing home sales are less important for economic purposes, and especially with new home sales being reported tomorrow morning, I will keep this brief.

What we are looking for is rebalancing in the housing market. For that to happen, we want the inventory of existing homes to increase, prices to stabilize, and sales to gradually pick up.

In June we got two out of three.

The inventory of homes for sale increased to 1.32 M. This series is not seasonally adjusted, so we look YoY, and there we find that this is the highest inventory for June since 2020:

Meanwhile the YoY% gain in prices was 4.1%. This metric is also not seasonally adjusted, and there we got the lowest YoY% increase since last December:

But sales of existing home declined 0.22 M annualized in June to 3.89 M. This is at the bottom of its range in the past 12 months, and reflects the increase in mortgage rates several months ago:

So, inventory is increasing, and prices are increasing at a slower pace, but sales are not picking up at all, at least not with the mortgage rates of 7% we saw several months ago.

I’ll compare with the situation as to new houses tomorrow.

Monday, July 22, 2024

How restrictive are real interest rates?


 - by New Deal democrat

Over the weekend Harvard econ professor Jason Furman suggested that the Fed funds rate is not very restrictive:

“As inflation has come down the real Federal funds rate has risen and is now the most restrictive it has been this cycle, a point that Austin Goolsbee has emphasized a number of times. … That is not the way I would look at it. The rates that matter for the economy are long rates. and expected inflation over, say, the next decade has not changed that much. So the real mortgage rate, for example, is restrictive but not increasingly so.”

Let’s take a look.

First, here is the historical look at the real Fed funds rate, i.e., the nominal rate minus the YoY inflation rate. Since it is currently just under 2.4% higher than inflation, I subtract that so the current rate shows at the zero line below:

Indeed the current real Fed funds rate is the most restrictive since just before the Great Recession. Beyond that, it is also more restrictive than during most of the 1960s and 1970s. Only during the 1980s and the latter part of the 1990s was it consistently higher. We’ll circle back to this further below.

Also, note that interest rates -not so  coincidentally - were only as restrictive or more restrictive than their current levels shortly before recessions during the 1960s and 1970s, as well as the 2000s.

But what about compared with longer rates?  Here is the same graph, again normed to zero at its current readings for the real 10 year treasury rate (blue), real 5 year Treasury rate (gold), and real 2 year Treasury rate (red) since the turn of the Millennium:

The two year real rate is almost as restrictive as the real Fed funds rate over this nearly 25 year period. Further, while the 5 and 10 year real rates are *relatively* less restrictive, they are still more restrictive than at almost any time in the past 10 years, and about average for the 15 years before that.

Here is the same graph for the period of the 1960s through 1990s for which data is available:

Longer term real rates are less restrictive than at almost any point in the 1980s and 1990s, but about average for the 1960s and more restrictive than most of the 1970s.

So the conclusion is that longer term real rates are generally more restrictive than at most times in the past 25 years, and about average for the last 40 years of the 20th century.

Which isn’t that helpful.

For forecasting purposes, there are two more important points.

1. The ECRI method that uses nominal long term bond rates as one of their four indicators that goes into their ”long leading index” does not make use of the yield curve. Rather, it asks whether long rates are higher or lower than they have been previously in the expansion. We know that rates are higher than they were before 2023, but have been roughly flat since then.

2. Now let’s circle back to the 1980s and 1990s. What was important during both of those very long expansions is that rates, although high in both nominal and real terms, *trended lower.* For example, here are mortgage rates in the 1980s and 1990s:

One of my top-line forecasting systems is based on the fundamentals of consumer behavior. Consumers can get more money to spend via higher real wages. Or an asset, like stocks or real estate equity, can appreciate in value and be cashed in. Or the interest rates servicing those loans can go sufficiently lower to allow for refinancing, thus freeing up more cash for spending.

In the 1980s and 1990s, interest rates, especially mortgage rates, very frequently made new lows. Thus even those in real terms rates were restrictive, they were *less* restrictive generally than one or two years before. Consumers refinanced, and spent the freed-up cash. It was only when no new rates were established for 3 years, and other assets stopped appreciating, that recessions occurred.

Currently we have higher real rates than at almost any time in the past 10+ years, at a level of restrictiveness equivalent to before recessions in the 1960s, 1970s, and 2000s, and long term rates that have not made new lows in 3 years.

In other words, the refinancing spigot has been shut off. If stock prices, real estate prices, and real wages stop appreciating - which they very importantly have *not* at the moment - the economy is very vulnerable to a turndown.

Saturday, July 20, 2024

Weekly Indicators for July 15 - 19 at Seeking Alpha


 - by New Deal democrat

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

While several of the monthly updates I’ve discussed here in the past week have tiptoed in the direction of yellow caution flags, that’s not apparent at all in the high frequency data that is updated every week, much of which comes from private sources.

In fact, this week for the first time in a long time, not a single coincident indicators was negative. A majority were positive, and the rest neutral.

As 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 gathering and organizing the data for you.

Thursday, July 18, 2024

Jobless claims join other data series inching in the direction of yellow caution territory


 - by New Deal democrat

Ever since jobless claims started higher in May, I’ve cautioned that I suspected that unresolved seasonality may be at play. We are now at the point where claims were at their low points for all last summer. In other words, last week through next weeks are the acid test for that hypothesis. Last week the news was good. This week it was more mixed.

Initial jobless claims rose 20,000 to 243,000, while the four week moving average rose 1,000 to 234,750. Continuing claims, with the usual one week delay, rose 20,000 to 1.867 million, the highest level since December 2021. I’ve needed to expand the graph below from its usual 2 year time period in order to show that:

On the YoY basis that is more important for forecasting purposes, initial claims were higher for the first time since early May, up 5.2%. But the less noisy four week average remained lower by -1.1%. Continuing claims were 4.5% higher, still within the lower end of their recent range:

There is an additional seasonal complicating factor this week, in that July 4 fell during different counting weeks last year vs. this year. For the combined 2 week period, initial claims were only 1,500, or 0.6%, higher than last year, at 233,000 vs. 231,500.

This is a very mixed signal, and seems likely to resolve higher YoY next week. The continuing uptrend in continuing claims in particular absolutely speaks to relative weakness in the labor market relative to one and two years ago.

Which brings me to the update of the “Sahm rule” forecast. As I have written numerous times, for over 50 years initial claims have led the unemployment rate. This year that has not been the case, as the unemployment rate has trended higher despite a downturn in initial claims during the first four months of this year. The likely reason is a surge of working age immigrants in the last two years, some of whom are having a more difficult time finding employment. Since they are in the labor force but have not previously held jobs, they are not filing for unemployment benefits.

With that lead-in, here is the updated graph through mid-July:

Both initial and continuing claims suggest that there will be upward pressure on the unemployment rate in the next few months. Since it is already at 4.1%, this suggests a significant chance that it will trigger the “Sahm rule,” although note that the comparison point, of the lowest 3 month average during the past 12 months, will also be moving higher. Because the likely trigger is immigration, however, as I have previously written the economy is likely to be nevertheless expanding - in other words, if triggered it is likely to be a false positive.

A one week 5.2% YoY. Increase in new jobless claims is not nearly enough to trigger even a yellow caution flag. For that we would need, at absolute minimum, a 10%+ comparison lasting multiple weeks. Still, together with the combined economically weighted ISM composite index, real retail sales, and housing under construction, we now have a number of significant sectors signaling weakness.

Wednesday, July 17, 2024

Industrial and manufacturing production close to 10 year+ highs in June


 - by New Deal democrat

If the news in housing construction this morning was cautionary, the news on manufacturing and industrial production was very good.

Manufacturing production (red in the graph below) rose 0.4% in June, and is only 0.2% below its post-pandemic high in October 2022. It is also only 1.2% below its highest level since the Great Recession, which was set in September 2018.

The news was even better for total industrial production (blue), which rose 0.6% in June to a new post-pandemic high, and is only 0.1% below its all-time high, also set in September 2018:

In the past, industrial production has been the King of Coincident Indicators, since its peaks and troughs tended to coincide almost exactly with the onset and endings of recessions. That weighting has faded somewhat since the accession of China to the world trading system in 1999 an the wholesale flight of US manufacturing to Asia, generating several false recession signals, most notably in 2015-16. But it is still an  important measure in the economy. 

In other words, while several important leading indicators are getting close to yellow flag cautionary signals, or in one case (real retail spending) already there, this very important coincident indicator signals all clear for the present.

Housing permits and starts stabilize, but construction comes close to generating yellow recession caution signal


 - by New Deal democrat

There was good news and bad news in this morning’s report on housing permits, starts, and construction. The good news is that both permits and starts stabilized after last month’s initially reported multi-year lows. The bad news is that single family permits declined further, and even worse the metric best showing the actual economic impact of new housing, building units under construction, declined to a new 2+ year low, only slightly above the level where it gives a recession caution signal. 

Let’s start with the good news.  the longest leading signal in the data - permits (black in the graph below) - rose 47,000 or 3.4% on an annualized basis to 1.446 million. Starts (light blue), which are slightly less leading and much more noisy, rose 39,000 or 3.0% to 1.353 million annualized. Further, last month’s abysmal readings for permits and starts were both revised higher.

Now the bad news. Single family permits, which are the least noisy of all the leading data (red, right scale) declined a further -22,000 or 2.3% to 934,000 units annualized:

In other words, the rebound in permits was all about the much noisier multi-family unit sector (gold in the graph below), which increased sharply but not in any way breaking its general downtrend:

Now let’s turn to the bigger bad news. Ill spare you the long term graph this month, but usually it has taken more than a 10% decline in units under construction to be consistent with a recession. In 1970 and 2001, the declines were less than that. But in the late 1980s and 2000s, it took almost a 25% decline before a recession occurred. 

With this morning's further decline, total units under construction (red, right scale) are now -8.6% below peak (vs. permits, black, left scale):

In the past few months I have commented that I did not expect this decline to exceed the -10% level, mainly because mortgage rates had stabilized, and mortgage rates lead permits and starts, which I also expected to stabilize. While obviously the situation is more dicey, I still believe we are getting close to, if not at, a stabilization point for units under construction, because mortgage rates are only slightly higher than they were one year ago, and depending on how you measure, are either generally flat or Elise in a slight uptrend (red, vs. permits, blue, right scale):

At the moment both single family units and multi-family units under construction are both in downtrends, but I expect single family units in particular to stabilize shortly, since that portion of the market was the first to turn down:

Earlier this month, I wrote that the economically weighted average of the ISM indexes was very close to generating a recession caution yellow flag. Yesterday I wrote that consumer spending as measured by retail sales already warranted such a flag. With this morning’s residential construction report, that sector too has gotten close to generating a yellow caution flag. The next big data I will be watching is whether personal spending on goods follows retail sales into cautionary territory, and whether employment in manufacturing and construction (the latter of which typically shortly lags, but follows, building units under construction), neither of which has turned down, change direction in the next few jobs report.