Tuesday, April 16, 2024

Industrial production for March is positive, but the overall trend remains flat


 - 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 increased 0.4% from an upwardly revised, by 0.2%, February; but it is still down -0.6% from its September 2022 post-pandemic peak. Manufacturing production increased 0.5%, but is also down, by -0.2% from its post-pandemic peak as well:

Before the “China shock,” a YoY downturn in industrial production almost always meant recession. As the YoY graph below shows, there was a significant “industrial recession” in 2015-16 without any generalized economic downturn:

Whether the 2019 downturn would have resulted in a recession by itself had the pandemic not intervened will always remain an unanswered question. But again in 2023 production was again down YoY with no recession. As of March, manufacturing production is flat YoY, while total production is now up by 1.0%.

Bottom line: while March was positive, the overall trend remains generally flat.

Simultaneous declines in housing permits, starts, and units under construction in March suggests seasonality glitch, not a change in trend


 - by New Deal democrat

There was a big decline in housing starts last month, and a smaller but significant decline in permits. Whether that signifies a change in trend or just noise is the issue. I lean towards the latter. To wit, in reaction to both January and Feburary’s housing construction report I wrote, “To signify a likely recession, units under construction would have to decline at least -10%, and needless to say, we’re not there. With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize.” I also indicated that I expected to see more of a decline in the actual hard-data metric of housing units under construction.

That is still the case.

To recapitulate my overall framework: mortgage rates lead permits, which lead starts, which lead housing units under construction, all of which lead prices. Of those metrics, the least noisy one that conveys the most signal vs. noise is single family permits.

In response to inflation data which generally stopped declining towards the holy 2%, mortgage rates have risen about .25% since the end of last year. For March as a whole, they averaged 6.82%. This is about average for the past 18 months, in which overall they have varied between 6.1% and 7.8%. In response permits have stabilized in the range of 1.42 million to 1.52 million units annualized. In March they declined -65,000 to 1.458 million annualized:

The relationship shows up even better when we compare the two series YoY:

With mortgage rates higher by a slight 0.25% YoY, permits went slightly positive YoY and are still higher by 1.5%.

As per usual, starts (light blue in the graph below) are the noisier of the metrics, declining 228,000 to 1.321 million annualized in March. Permits (dark blue) declined -65,000 to 1.458 million, and single family permits (red, right scale) declined -59,000 to 973,000:

These are among the poorest numbers for each in the past 12 months, but the simultaneity of the downturn (as opposed to a 1-2 month lag in starts) makes me suspect there may be a seasonal adjustment issue in play, perhaps having to do with Easter. Still, there isn’t enough there to break out of their range, and as discussed above mortgage rates have not suggested one is coming.

Next, to reiterate: housing units under construction (red in the graph below) are the best measure of the actual economic activity in the housing market. Here’s the long term historical view:

Those also declined, by -15,000, to 1.646 million units annualized:

Once again note the synchronicity of the downturn, making me suspect a seasonality glitch. Further, they are only down -3.7% from their peak, nowhere near the historical -10% most consistent with the onset of a recession.

Below I have broken out single vs. multi-family construction. Because, in response to record high house prices, builders turned to higher density, lower cost apartment and condo construction. Hence the record high last year in that metric. Last month multi-family construction faded slightly, while single family units under construction actually continued their slightly increasing trend:

As I wrote last month, I do expect a further gradual decline in total housing units under construction in the months ahead, to catch up with the decline in permits that bottomed one year ago. Here’s the post-pandemic view of starts, permits, and total units under construction:

But, as shown above, I doubt we will cross the -10% threshold that it would normally take to signal a recession, given the general stabilization of both permits and starts over the past 16 months.

Monday, April 15, 2024

Real retail sales rebound, forecast a continued “soft landing” for jobs growth


 - by New Deal democrat

As per usual, real retail sales is one of my favorite indicators, because it gives so much information about the consumer, and since consumption leads employment, it helps forecast the trend in the latter as well.

And the news this morning was good, as nominally retail sales increased 0.7% in March, while February’s number was revised higher by 0.3% to 0.9%. After accounting for 0.4% inflation in March, real retail sales increased 0.3%, and February was revised up to 0.5%.

To the extent there was bad news, it was that January’s -1.2% decline has still not been completely erased.

To the graphs: first, below I show the historical record for the past 15+ years of both real retail sales (dark blue) and 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:

Real retail sales are still -2.9% below their April 2022 peak, and also about -1% below their nearer term August 2023 peak. Real spending on goods has been more positive. More importantly for the long term trend, real spending on goods has now completely caught up with real retail sales. The bigger picture is that real retail sales have trended neutral, while real spending on goods has trended higher.

Turning to the effect on employment, here is the longer term YoY% gains in both spending measures /2, which is the best match to forecast the near term trend in jobs (red):

Employment doesn’t respond to every noisy move in spending, but does tend to peak and trough about 6 months after spending, and responds to the longer term trend. If FRED allowed 6 or 12 month moving averages, the correspondence would be much closer.

With that caveat, here is the post-pandemic close up:

Historically negative YoY comparisons in real retail sales have usually meant recession, while positive comparisons have almost always meant continued expansion. Needless to say, that didn’t happen in 2022-23. The overall trend since mid year 2023 has been “less negative” to neutral, while real spending on goods has remained positive.

And as those YoY comparisons in consumption have improved, we have seen the decelerating trend in employment shift to a more consistent “soft landing” scenario. Thus real retail sales are forecasting continued growth in the neighborhood of the last few months’ numbers going forward through most of this year.

Saturday, April 13, 2024

Weekly Indicators for April 8 - 12 at Seeking Alpha


 - by New Deal democrat

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

There has been a lot o churn in both the short leading and coincident indicators in the past few weeks, but the overall tone is towards a more positive economic environment.

As usual, clicking over and reading will bring you up to the virtual moment on the data, and reward me just a little bit for my efforts.

Friday, April 12, 2024

March consumer price inflation was still mainly about the dynamics of shelter and gas prices


 - by New Deal democrat

The one advantage of not reporting on the March CPI results for two days is I’ve had the opportunity to look at more data in depth and mull things over.

And I’ve decided that there really wasn’t much change from the pattern we’ve seen for about the past 9 months. Basically the month to month variation in inflation is a function of the interplay between shelter and gas prices. During late 2022 and early 2023, the latter were still accelerating or steady at a high rate of inflation, while the latter were falling. Beginning in late 2023, the dynamic reversed, as shelter inflation was slowly decelerating, while gas prices had bottomed.

The big takeaway for the last several month has been a renewed increase in gas prices, while the deceleration in shelter inflation has slowed. There have been a couple of other players in the process that I’ll also discuss below.

First, let’s look at the month over month change in inflation for shelter as a whole (dark blue) vs. rent of primary residence (light blue) and owners’ equivalent rent (red) for the past 6 years:

In the years prior to the pandemic, the three averaged +0.3% growth +/-0.1% each month. After the pandemic, they peaked at roughly .75%, and in the past 12 months have slowly declined from an average of +0.5% per month to +0.4% per month. 

On a YoY basis, the various measures of shelter have decelerated from roughly +8% to just over 5.5%:

Because house prices lead shelter inflation with a 12-18 month lag, here’s the update of that metric:

Since house prices are presently increasing at 2.5% YoY, about average for the pre-pandemic period, I expect OER and the other measures of shelter inflation to continue to decelerate YoY, but probably at a slow pace compared with their initial rapid decline, because they will be compared with +0.5% monthly increases 12 months before vs. 0.7% at their peak.

Now let’s take a look at monthly gas prices (dark blue in the graph below) vs. energy prices generally (light blue). On a monthly basis, these had mainly declined beginning in mid-2022, but in the last two months have increased at more than their pre-pandemic average:

On a YoY basis, both are now higher, by 1.3% and 2.1% respectively:

This contrasts with their negative YoY readings for almost the entirety of the previous 16 months. 

So, to summarize: the deceleration in shelter inflation has slowed, while gas prices have reversed higher. This explains most of the increase in monthly inflation in the past several months, as is shown in the graph below comparing energy inflation (grey), headline (blue), core (gold), and inflation ex-shelter (red) YoY:

The reversal in gas prices has caused a similar, albeit smaller, reversal higher in both headline inflation and inflation ex-shelter. But it is noteworthy that, simply by excluding shelter, inflation is still only higher by 2.3%. 

In other words, it remains the case that, except for shelter, US consumer inflation is well-behaved.

As noted above, let me also take a look at several other sectors of note. Although I won’t bother with a graph, the former problem children of new and used vehicle prices have reached a new equilibrium. New car prices have actually *declined* -0.1% YoY, while used vehicles are down -2.2% YoY.

The remaining problem areas of inflation are:

 (1) food away from home, which peaked at 8.8% YoY one year ago, and is now down to 4.2%, 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 5.0% in March; and 
 (3) transportation services - mainly car repairs and insurance - 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 10.7%.

I’m not sure if there is more to the electricity story than the price of gas-powered turbines. But car repairs are up 8.2% YoY, and motor vehicle insurance is up a whopping 22.2%! 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:

So while I expect food away from home to continue to revert to its prior average, and perhaps electricity as well, price increases in transportation services may remain a problem for quite some time.

Real average wages and aggregate payrolls signal continued growth


 - by New Deal democrat

On Wednesday I was traveling so I didn’t get around to writing about the important CPI release. Let me start my delayed response by updating real wages and payrolls for non-supervisory employees.

Historically, as I have pointed out a number of times, real aggregate payrolls (red in the graph below) have a flawless record over the past 50+ years of peaking in the months ahead of a recession (Note: I show the last 30 years below. From the late 1960s through early 1990s, real wages declined almost relentlessly as the combination of the huge Baby Boom generation plus women entering the workforce applied potent downward pressure on wages, but increased aggregate payrolls and household income as there were many more two wage-earner households):

and turning negative YoY close to simultaneously with its onset. Real nonsupervisory wages (blue) have a less stellar record, but have almost always sharply decelerated or turned negative before or shortly after the onset of a recession, because inflation typically has accelerated faster than wage growth late in expansions, while the Fed has raised rates to tamp down demand:

Last Friday we found out that wages rose 0.2% for the month and 4.2% YoY, continuing their pattern of slow deceleration. Aggregate payrolls rose a strong 0.7% for the month and 6.1% for the year. With Wednesday’s 0.4% increase in consumer prices, real wages actually declined by -0.1% for the month, while real aggregate payrolls rounded up to 0.4%. On a YoY basis, real wages are up 4.2%, and real aggregate payrolls rose 6.1%:

Here are the real absolute numbers, norming inflation to “1” as of last month:

Real wages have declined in the past several months, but they have not broken trend yet. Meanwhile real aggregate payrolls set yet another all time record high. With this new high, and with real aggregate payrolls up close to 2% in the past year, continued expansion in the immediate future remains almost certain. 

Thursday, April 11, 2024

Initial claims continue to be rangebound, and a positive for the near term forecast


 - by New Deal democrat

[NOTE: After traveling all day yesterday, I decided to put off any comments on the CPI upside surprise until later today. Short version is that shelter continues its slow decent, gasoline picked up, and services are accelerating as one might expect in a strong economy with the supply chain tailwind having dissipated.]

Initial claims continued to be rangebound this week, declining -11,000 to 211,000. The four week moving average declined -250 to 214,250. With the usual one week delay, continuing claims increased 28,000 to 1.817 million:

On the YoY% basis more important for forecasting purposes, weekly claims were down -4.1%, the four week average down -4.4%, and continuing claims up from last week’s 12 month low to 7.1%:

While continuing claims are a negative, they are much less so than they were during the last nine months of 2023. The more leading initial claims remain firmly positive.

One week of data doesn’t give me enough information to make it worth updating the Sahm rule forecast, but here is the YoY% comparison through the end of March:

For the month, initial claims were down -5.9% YoY, while the unemployment rate was up 5.6% (note this is a ‘percent of a percent’). Because the YoY comparisons in both initial and continuing claims have improved since late last year, I expect the YoY comparison in the unemployment rate to follow suit, meaning a slight decline in that rate is more likely than a return to its recent peak of 3.9%.