Friday, May 17, 2024

Real wages, payrolls, and consumption vs. employment, and their forecast implications: April update

 

 - by New Deal democrat



With this week’s inflation report for April, we can update several measures of the real economic status of average American workers, as well as their forecast for further job and economic gains.


First, here is real average hourly wages for nonsupervisory workers. In April, nominal average wages increased 0.2%. Since consumer inflation increased 0.3%, real nonsupervisory wages declined -0.1%, the third monthly decline in a row:



Real nonsupervisory wages are up 2.8% since just before the pandemic, and while the sharp increase in 2020 can be discounted due to compositional effects (many more low wage service workers were laid off during the pandemic closures than more highly paid office workers), still real average hourly wages have made no progress at all since July 2020.

On the other hand, on a YoY basis, real average hourly wages are up 0.6%, which historically is not bad:



For the real amount of wage income available to the American working and middle class as a whole, we turn to real aggregate payrolls. Because the number of hours worked actually declined during April, these only increased 0.1%, so in real terms they declined -0.2%:



With the exception of the pandemic, these have always peaked between 4 and 10 months before the onset of recessions. As the longer historical graph below shows, one month decline is not unusual, but obviously if this continues for several more months it would be of increasing concern:



On a YoY basis, these are up 2.1%. Typically they have sharply declined to negative territory coincidently or very close thereto the start of recessions:



There is no sign of any such sharp decline at present. So these remain a very positive sign for the economy now.

Finally, retail sales for April were unchanged, meaning real retail sales declined -0.2%. As I have written many times over the past 15 years, although the relationship is somewhat noisy, consumption leads employment. Here is the historical graph of the 25+ years before the pandemic:



And here is the post-pandemic record, with real retail sales down -0.3% YoY as of April:



Typically employment changes at about 1/2 the rate of consumption, so the above graphs divide YoY consumption by 2. One year ago job gains were averaging just under 300,000 per month, so real retail consumption suggests that employment gains will be significantly below those levels in the next few months, although still positive. 

Thursday, May 16, 2024

April housing: Uh-oh, housing units under construction has stopped levitating

 

 - by New Deal democrat


This morning I pointed out that manufacturing production is -1.8% below its 2022 high, and may be in a slightly declining trend. Which means that added attention has to be paid to whether the other leading production sector, construction, is holding up. 

Instead, this morning brought the first sustained evidence that housing units under construction, the “real” economic measure of the residential building sector, which had been levitating at or near its  post-pandemic high for over a year, has finally turned down.

To cut to the chase, housing units under construction declined -1.4% in April, after a -1.1% decline in March. It is now -5.6% below its October 2022 peak (single family and multi-unit numbers also shown):



In the past, it has typically taken a -10% decline or more before the onset of a recession. After a minor decline in 2023, in the past four months the increased pace of decline has taken us over half the way to that mark:



Earlier this year, while noting that I expected to see more of a decline in the actual hard-data metric of housing units under construction, I wrote that “With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize.” Here’s the updated look.

Below I show total permits (dark blue) compared with the much more volatile and slightly less leading total starts (light blue) and also compared with single family permits (red, right scale) which are the most leading and least volatile of all:



Starts rose a sharp 5.7% for the month, while total permits declined -1.0% and single family permits declined -0.8%. The dip in total and single family permits in the past two months has taken us back to January 2023 levels, between -20%-25% below that peak. Historically it has taken more than a -30% decline, or even a -40% decline, before a recession has begun:



April’s decline in permits in turn was most likely caused by the increase in mortgage rates back above 7%. As per usual, mortgage rates lead permits:



Importantly, it’s worth noting that even so, we have not seen mortgage rates anywhere near last October’s 7.79% peak.

My sense is that, while housing units under construction will decline further, unless interest rates increase further, permits and starts will stabilize, and after a period so while units under construction, without crossing into recession warning territory.

At the same time, this is the most negative housing construction report since the end of 2022, when there were a lot of other signals that suggested a recession might be very close. 

To return to my opening comment, this year I am paying extra close attention to the manufacturng and construction sectors, because a significant turndown in both of those simultaneously would be a danger signal for oncoming recession. This morning we did get reports showing declines in both. Only one month, but these are the two most negative economic reports of this entire year so far.

Jobless claims still positive, still suggest at least a slight improvement in unemployment in coming months

 

 - by New Deal democrat


[Programming note: I’ll discuss housing permtis, starts, and units under construction later today. Preliminarily, this morning’s housing report may have been the most significant negative data of the entire year so far. Stay tuned.]


Initial jobless claims declined -10,000 last week back into its recent range, to 222,000. The four week moving average rose 2,500 to 217,500. With the usual one week delay, continuing claims rose 23,000 to 1.794 million:



This takes back some - but not all - of the caution raised by last week’s big jump, with the important caveat that there may be some unresolved seasonality at work, given the similar increase last summer that began in May.

The more important for forecasting purposes YoY figures, initial claims were down -1.3%. The four week average was down -0.2%, and continuing claims were up 4.9%:



Although the recent trend is tending towards the negative, as of now both initial claims comparisons remain positive for the economy. Continuing claims, while negative, with the exception of three weeks at the turn of the year have been in the range of 1.750-1.830 for the past ten months. Unless there is a significant change, continuing claims are boing to be much less of an issue in about eight weeks.

Two weeks into May, let’s update our Sahm Rule comparison as well. This year has averaged out to 227,000, which is exactly equal to last May’s average. This tells us that the YoY comparisons with the unemployment rate one year ago should improve in the next few months:



Since the unemployment rate last May was 3.7%, and the May-July average was 3.6%, I continue to expect the unemployment rate to improve slightly. Even using the less leading continuing claims metric, since the YoY comparisons are getting less negative, I would not expect any further incrrease in the unemployment rate at very least over the next few months.

Industrial production still flat, manufacturing slides

 

 - by New Deal democrat


Industrial production, one of the premier series the NBER has historically used to declare recessions vs. expansions, has faded in importance since China was admitted to regular trading status in 1999. As you can see in the first graph below, both total and manufacturing production peaked in 2007. Further, manufacturing has continued to fade, as its post-pandemic peak has not equaled its 2010’s peak either:



In March, total production was unchanged from net upward revisions to February and March. Without those revisions, production would have been up 0.1%. Nevertheless it is still down -0.7% from its September 2022 post-pandemic peak. 

The news was significantly negative for manufacturing production, which declined -0.3% from net downward revisions of -0.2% for February and March, and is down by -1.8% from its post-pandemic peak as well:



Note that in 2023, like 2015-16, and 2019,  production was again down YoY with no recession. As of April, manufacturing production is down -0.1% YoY, while total production is down -0.4%.

Through March, production had essentially been flat. With all the revisions, as of April the trend may still be neutral, or it may have turned slightly negative. This is what we have been seeing for a year or more in both the ISM manufacturing index and in the Fed regional indexes. 

My overall theme for this year has been to watch both manufacturing and construction for any signs of strength or weakness. If we have - at least as of April - a confirmed sign of weakness in manufacturing, then construction becomes even more important. In my post later today, I’ll update that sector.

Wednesday, May 15, 2024

Real retail sales back to negative YoY

 

 - by New Deal democrat


Here is today’s update on one of my favorite indicators: retail sales. In April they were unchanged on a nominal basis. Adjusted for inflation they declined -0.3% for the month. They are also down -6.2% from their 2021 peak and -2.9% since January 2023:



On a YoY basis, they have also returned to the negative side, down -0.3% (note two graphs below adds 0.3% to show at the zero line):



Here is the historical comparison going back 30 years:



With the notable exception of last year, such a YoY decline has only happened during recessions (and with few exceptions the same is true going back 75 years with the predecessor series).

Because the two series tend to trend similarly, below I show the historical record for the past 15+ years of both YoY real retail sales (dark blue) and YoY real personal spending on goods (light blue), a similar but more comprehensive measure. The two metrics tend to trend together over time, although the latter has tended to increase more (hence I adjust to bring the trends more in line):



Here is the close-up post-pandemic view:



With the addition of this month’s data, the bigger picture is that real retail sales, which recently had trended neutral, now appear to be trending slightly downward, while real spending on goods has continued to trend higher.

Unless and until there is a confirming downshift in real personal spending on goods, which when positive have almost always meant continued expansion, there does not appear to be any reason for alarm.

April consumer prices: still an interplay of gas and house prices, with a side helping of motor vehicle insuance

 

 - by New Deal democrat


First, a programming note: I’ll post about retail sales later today.

Consumer inflation in April continued essentially to be an interplay between shelter and gas prices, with a side helping of auto insurance and repairs. During late 2022 and early 2023, shelter was still accelerating or steady at a high rate of inflation, while gas prices were falling. Beginning in late 2023, the dynamic reversed, as shelter inflation was slowly decelerating, while gas prices had bottomed. That remained the case in April.

So first, let’s look at the month over month change in headline inflation (blue) vs. inflation less energy (red) and inflation less shelter (gold) for the past two years:



All three rounded to +0.3% increases in April, about par for the first two for the past twelve months, and above average for CPI less shelter.

On a YoY basis, the trends become clearer, with the increase in gas prices leading to an increase in all items less shelter, steady headline inflation, but a continued deceleration in CPI less energy - which is another way of saying that energy prices have increased, while shelter price gains have continued to abate:



In particular, shelter has continued to behave as I expected. Here is an update to the 12-18 month leading relationship between house prices (as measured by the FHFA) and Owners’ Equivalent Rent in the CPI:



House prices are currently increasing at about their average pre-pandemic rate, which has translated to OER and the other measures of shelter inflation to continue to decelerate YoY, but at a slower pace than their initial rapid decline. On a YoY basis, OER has increased 5.8%, a -0.1% decline from its YoY rate in March. Rent of primary residence (not shown) has followed a similar trajectory, currently up 5.4% YoY vs. 5.7% YoY in March. I expect this trend to continue in the coming months.

Although I won’t bother with a graph, the former problem children of new and used vehicle prices have reached a new equilibrium. Used car prices have actually declined -6.9%YoY, including -0.4% in April. New car prices are also down -0.4% YoY.

The remaining problem areas of inflation are:

 (1) food away from home (fading), which peaked at 8.8% YoY just over one year ago, and is now down to a 4.1% increase, close to its pre-pandemic average of 2.5%-3.0%;
 (2) electricity, which has followed gas prices higher, rising from 2.2% YoY last August to 5.1% in April, although it declined -0.1% for the month; and 
 (3) transportation services - mainly car repairs (unchanged for the month, but up 7.6% YoY) and insurance (up 1.8% for the month and up 22.6% YoY!) - which has rocketed from its pre-pandemic range of 2.5%-5.0% to as high as 15.2% in October 2022, and is now still up 11.2%.



Although I won’t repeat the graph this month, based on the past inflationary period of 1966-82, it is clear that transportation services lags increases in vehicle prices by 1-2 years and even more, sometimes increasing right through recessions

To summarize: if we exclude the well-documented historically lagging sectors of shelter prices and motor vehicle insurance, consumer inflation continues to be well behaved. To repeat: ex shelter, consumer prices are only up 2.2% YoY. Any surprises in the month ahead will likely be due to changes in gas prices. If gas prices become well-behaved again, headline inflation should go below 3%

Tuesday, May 14, 2024

April producer prices reflect some building pressure from a strong economy with full employment

 

 - by New Deal democrat


Tomorrow and Thursday a plethora of data will be released, on consumer inflation and spending, production, housing, and jobless claims. In the meantime today we got a chance to look at upstream pressures on inflation.


And those upstream pressures do seem to be building slightly, reflecting a strong economy with full employment.

Commodity prices increased 0.9%. These are very volatile, so this was not particularly out of the ordinary, as shown in the below graph of monthly changes for the past 10 years:



YoY commodity prices are just 0.1% above unchanged (red, left scale in the graph below). They are very well behaved compared with just after the pandemic (blue, right scale):



By the time we get to finished products, we can see some pressures building up particularly as to goods (blue), which increased 0.7% in April and so far this year are up 4.1%. Service inflation (red) for producers rose 0.6%, the second highest monthly increase in two years:



By contrast, as shown in the below graph, in the six years before the pandemic, final demand goods and services typically rose on the order of 0.2% or 0.3% monthly:



Nevertheless, on a YoY basis both producer goods and services inflation is well within its normal range prior to the pandemic:



There is reason to believe, at least when it comes to goods, that the recent bigger monthly increases may not last. Below is the most recent update of the FRBNY’s Global Supply Chain Pressure Index:



Each horizontal line represents one standard deviation from the long term average (including the pandemic).  Since late last year there had been some tightness compared with the pre-pandemic average, but in April this entirely dissipated.

So to reiterate, it looks likely that there is a little producer pressure due to a strong economy and full employment, but nothing out of the range of normal on any significant time frame at this point.

Tomorrow we will see how this plays out with consumer prices. Because gas prices increased 5.4% in April, I am expecting the headline number to come in a little hot as well. Meanwhile I expect shelter inflation to continue to abate but more slowly than in the past 12 months. We’ll see.

Saturday, May 11, 2024

Weekly Indicators for May 6 - 10 at Seeking Alpha

 

 - by New Deal democrat


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

The majority of short leading and coincident indicators continue to show strength rather than weakness. This week it was commodity prices’ turn to show that the global economy is getting stronger.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me with a little pocket change for my efforts.