Wednesday, December 6, 2023

Real consumer spending forecasts continuing jobs deceleration


 - by New Deal democrat

As I’ve written many times over the years, one of the best short leading indicators for the jobs market is real consumer spending. Usually I use real retail sales. In this post I’m going to expand the analysis to real personal spending as well.

To begin with, it’s important to realize that in most recessions only real personal spending on goods (blue in the graphs below) turns down. In most recessions in the past half century, real spending on services (gold) continues to rise throughout. Here’s from 1960-1990:

And here is 1991-present:

I’ve noted recently that manufacturing plays a much smaller role in the total US economy now than it used to in the decades after WW2. As a result, it appears that for a recession to occur, it has become increasingly necessary that spending on services falter as well. The below graph shows the same information as above, but on a YoY% lelel. Note how over time real spending on services YoY has decelerated from 3%-6% to 1%-3%:

But with just a few exceptions (1987, 2002), real spending on goods turning negative YoY has been a good indicator of recessions.

So here is what real spending on goods and services has looked like in the aftermath of the pandemic:

We had a false alarm in the first part of 2022, but this year spending on goods has recovered.

Now let’s look at real spending on goods YoY (dark blue), real retail sales (light blue) and employment (red) since 1960:

Both spending series tend to track closely to one another, although real retail sales has been more volatile, and frequently turns negative a little sooner. But note that they both have an excellent track record of leading jobs data, once they turn down (and up).

Here is the post-pandemic record:

Real retail sales is still negative YoY. And not only have both series accurately forecast a continuing deceleration in jobs gains, but they continue to forecast further deceleration.

I came across a quick note earlier this week elsewhere that we might get a negative print as to private jobs this Friday. Indeed, in the past year or so not only have private jobs underperformed total employment, but they have had two readings of less thank 100,000 growth in the past five months:

Comparing this with the past forty years, even negative prints for private jobs have not necessarily forecast a recession (note below graph subtracts 100,000 so that any reading below 100,000 shows as negative). They were particularly common during the 2002-07 period, and again beginning in 2018:

Still, another print under 200,000 for total jobs (leaving aside the return of UAW workers to their jobs) looks likely, and a print under 100,000 would not be surprising at all.

Tuesday, December 5, 2023

October JOLTS report: yet one more month in the ongoing decelerating trend

 - by New Deal democrat 

All of the major metrics in this month’s JOLTS report for October continued to show deceleration. Here are openings (blue), hires (red), and quits (gold), all normed to 100 just before the pandemic:

As you can see, at 98.1 and 103.9 respectively, both hires and quits are virtually identical to where they were before the pandemic. Meanwhile job openings declined to their lowest level since early 2021, and are down 2/3’s from their post-pandemic peak towards their prior levels. The one positive is that neither quits nor hires have deteriorated signifiantly in the past three months.

Meanwhile the number of layoffs and discharges increased, although not to a new high, and the trend this year can be read as either flat or increasing:

Finally, three months ago I premiered a comparison of the quits rate (blue in the graph below) and average hourly earnings (red). This is because the former has a 20+ year history of leading the latter, which I have in the past described as a “long lagging” indicator that turns well after most other metrics. Here’s the update on that comparison for this month:

The good news is that the quits rate has held steady since July. But because wages lag, they are more likely than not going to decline YoY from last month’s 4.4% YoY growth, although holding steady or a slight increase to 4.5% can hardly be ruled out.

In conclusion, we have yet another month confirming the ongoing deceleration in the jobs market. 

Monday, December 4, 2023

A big increase holds up construction spending in October; and construction spending is holding up the economy


 - by New Deal democrat

Construction spending for October was reported last Friday, and every sector but nonresidential ex-manufacturing showed increases:

Total spending was up 0.6%, residential a sharp 1.2%, and manufacturing 0.9%. Only nonresidential ex-manufacturing declined, by less than -0.1%.

The big increase in manufacturing construction due to the Inflation Reduction Act, which has encouraged re-shoring, has helped keep total construction spending positive. But so has other non-residential construciton, as shown by this graph which norms each category to zero just before the pandemic:

On a YoY basis manufacturing is the star of the show. But note from the historical graph that residential construction previously has turned down first, with manufacturing and other non-residential construction lagging (likely because of long lead times and the extended duration of completing projects):

But as the first graph above shows, on an absolute scale manufacturing construction has been a secondary player except for the period between December of last year and May of this year, in which it accounted for almost 2/3’s of the entire gain. Since then, residential construction improvement has again moved to the fore.

Historically residential construction spending has moved generally on a coincident basis with the number of building units under construction (except that the former, of course, is affected by inflation):

The decline in building costs (gold, below) helps explain why residential building construction has not just held up, but actually increased even as a big increase in mortgage rates has caused a big decline in permits and starts:

And the fact that construction spending has improved so much is a big reason why the economy has continued to expand. With manufacturing less of a factor overall, construction is a bigger pard of the goods-producing part of the economy. Unless and until construction rolls over, therefore, it is unlikely that the economy as a whole will roll over as well.

Sunday, December 3, 2023

Weekly Indicators for November 27 - December 1 at Seeking Alpha; plus a comment on the ISM manufacturing report


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The coincident data continues quite strong, and the long leading indicators are increasingly “less bad,” which is something that happens when recessions are beginning to ebb.

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and bring me a little bit of Holiday Cheer.

While I am at it, as noted on Friday, let me make a couple of comments about the latest ISM manufacturing report. I’m going to discuss construction spending separately in a day or two.

While both the headline and new orders numbers continued to show contraction, at 46.7 and 48.3, respectively, note that the trend in new orders in particular over the past few months is slight improvement:

The bottom line of which is, if there was no recession when the new orders index was coming in at levels under 45 earlier this year, it is unlikely that there is one now. Partly this is because the ISM survey is a diffusion index (i.e., unweighted), and so it has not been showing the relative strength in the important motor vehicle and parts manufacturing sector; and partly it is that manufacturing in the US is less a proportion of GDP than it was in the second half of the 20th century - so it takes a bigger decline to make a similar impact.

If the Fed-induced downturn in credit conditions and loan applications spreads out further into the economy, it is going to take an actual downturn in ongoing construction (of which there is scant evidence so far) to produce it.

Friday, December 1, 2023

Ex-housing, PCE inflation, like CPI inflation, is under th Fed’s 2% target


 - by New Deal democrat

Note: I may not be around for the ISM manufacturing or construction spending reports this morning. If so, I’ll comment later (maybe over the weekend) about them. What I’ll be watching for: as to manufacturing, because the ISM is a diffusion index, it didn’t pick up the big increase in vehicle manufacturing earlier this year. How does that shake out for October (bearing in mind the UAW strilke)? As to construction spending, which typically trends in conjunction with building units under construction, does it hold up, or turn down (signaling a decline in housing construction)?

One thing I didn’t comment on with regard to yesterday’s personal income and spending report was inflation. So let’s take a look today. Spoiler alert: it generally mirrors the CPI report.

To begin with, PCE inflation for over a year has been all about services. Since June of last year, there has been *no* inflation in goods prices (red in the graph below). In the past 6 months, while total PCE inflation (gold) has been 1.2%, goods inflation has been a whopping 0.2%. Services inflation (light blue) has been 1.8% (or 3.7% annualized). Backing out housing and energy, services inflation (dark blue) is up 1.5% (or 3.0% annualized):

Another way to look at this is the month over month (light blue) or quarter over quarter (dark blue) changes in the PCE index excluding energy and housing, vs. the quarter over quarter changes in housing plus utilities (red):

In Q3, the former was up 0.8%, while the latter increased 1.3%. In October, the former increased less than 0.2%. 

As with CPI inflation, it’s clear that housing is the culprit. 

Harvard economist Jason Furman posted a couple of similar graphs yesterday, showing the monthly and 3 month average of the core PCE price index ex-housing:

And including housing, but substituting current rent increases for the official measure:

As he writes, core ex-housing is up only 1.7% YoY, and substituting current rents for the official measure of housing is up only 1.5%.

Just as a refresher, this is exactly what CPI ex-shelter looks like:

To be absolutely clear: the PCE inflation gauges, just like the CPI measures, show that excluding housing, inflation is already under the Fed’s 2% target. And if we include more current rent and house price measures, it is even a little lower than that. 

Please do note that in the past few months, both PCE ex-shelter and CPI ex-shelter have bottomed. They aren’t really increasing, but they’ve stopped decreasing. But - I know I’ve said this before - there really is no valid reason for the Fed to maintain a restrictive posture on interest rates. Indeed, if the Fed lowered rates a little, and mortgage rates declined to, say 5.5%, that might break the logjam in the existing home market, and via more inventory paradoxically help keep prices down.