Weekly Indicators for July 7 - 11 at Seeking Alpha

 

 - by New Deal democrat

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

Despite the warning signs in some of the recent monthly data that I’ve highlighted in the past several weeks, the high frequency data this past week indicated smooth sailing, at least for now.

Some of that is likely due to the 4th of July being one week ago, so some consumer data in particular rebounded. But at least one indicator - the S&P 500 making another new all-time high on Thursday - I suspect is due to absolute complacency; namely, the TACO trade. Wall Street must believe that T—-p is going to chicken out again w/r/t his new tariff announcements.

In any event, clicking over and reading will as usual bring you up to the virtual moment as to the state of the economy, and reward me a little bit for collecting and organizing it for you.

Putting markers down: what will it take for my forecast to activate a “recession watch”?

 

 - by New Deal democrat

Our data drought won’t end until next Tuesday. In the meantime, let me follow up on a theme from my analysis of the economic data from last week. To wit: there are several metrics that I have already stated are worth a “recession watch;” namely, housing units under construction (down almost 20% from peak), and the 3 month economically weighted ISM new orders subindexes (just into contraction territory at 49.3). Additionally, real aggregate nonsupervisory payrolls look like they may be rolling over. But there are many other measures that are not signaling a recession in the immediate near term (e.g, employment in the goods producing sector).

As I noted several weeks ago, in the past 50+ years, in addition to COVID, almost always there has been a domestic political or geopolitical shock that has precipitated US recessions. There are two excellent candidates — the regressive tax bill just passed by Congress, and Tariff-palooza! - for such shocks. That’s the “fundamentals” view.  

But, what data will it take for me to actually go on “recession watch?” And the answer is, at least some of the following continuing or turning negative.

To begin with, several long leading indicators. Last month I updated my look at the non-financial long leading indicators — corporate profits, housing, and real per capita consumption, summing up that “the housing sector is giving recessionary readings. Corporate profits adjusted for inventories are weakening, but are still positive YoY. But real sales are not just positive, but they have been improving.”

Let me update each of the three since then.

First, the last shoes in the housing sector to drop after units under construction but before a recession are housing units for sale in the new home sales report, and employees in residential construction. Here is the long term view of each:

And here is the post-pandemic close-up:

The two measures have tended to peak very close in time to one another. In the last few months there have been signs that both are doing so now. New homes for sale did make a new high - just barely - last month, and the rate of increase has gradually slowed over the last nine months. Meanwhile, employment in residential construction actually declined slightly last month, and has grown less than 0.1% in the past three months. 

New home sales will be reported for June in two weeks. I would expect to see a decline before a recession. 

While corporate profits for Q2 won’t be reported until the end of August, the proxy of proprietors’ income will be reported at the end of this month. Although this rose in Q1 (not shown) I would expect it to decline before a recession. In the meantime, here is the latest actual (through Q1) and forecast (beginning Q2) S&P 500 earnings from Earnings Insight as of last week:

Usually forecast earnings just before actual reports are too pessimistic, so I expect the Q2 number to improve once actual earnings are in. Companies don’t normally cut staff if profits and sales are increasing, but if there is a 2nd consecutive decline, the likelihood of more layoffs increases. 

Another important measure is “real final sales to private domestic purchasers” from the GDP report, which as noted above will be reported at the end of this month. There increased 0.47% in Q1. Here’s how that compares historically pre-pandemic, subtracting 0.47% so that it appears right at the 0 line:

In the past, increases such as we got in Q1 either occurred in times of weak growth - or just before or during a recession. 

Here is the post-pandemic view:

If real sales in the GDP report in two weeks are as weak or weaker than in Q1, that would strongly suggest we are on the eve of a recession.

Now let’s look at real consumption as measured by both real retail sales and real spending on goods pre-pandemic, including the latest personal spending report from two weeks ago:

Even without taking into account population growth, real retail sales have tended to flatten or decline months before a recession begins. Here is the post-pandemic update:

Both of these did quite well in 2024, but there are signs that both have been peaking this year. Should both reports continue to go sideways or even decline further, that would suggest that consumers are pulling in their horns.

Finally, I would expect an increase in layoffs. There are signs from continuing jobless claims, as well as the anemic recent nonfarm payrolls growth, that hiring is weakening. Additionally, the comprehensive QCEW census (not shown) has indicated that there was only 0.8% job growth in 2024 rather than the 1.3% officially shown in the un-benchmarked jobs reports. But as I noted yesterday, initial claims are only slightly higher YoY. 

Here are several measures of layoffs including not just initial claims, but also layoffs and discharges from the JOLTS report, and the number of short term unemployed, and total unemployed from the jobs report. Here is a historical pre-pandemic look:

The most reliable measure, as above, is initial claims. Additionally, the number of unemployed has generally risen to at least 5% higher YoY several months before a recession has begun. The other two are much more noisy, although they too generally increase.

Here is the post-pandemic record:

As discussed a number of times last year, the increase in several of these numbers likely had to do with the surge of immigrants looking for first time work. This has most likely ended. But I would expect the four week average of initial claims to increase to 10% higher YoY at least in order to justify a recession watch.

In addition a to looking for a downturn in goods producing employment and aggregate real payrolls in the employment report, if all of these either continue weak, or turn weaker, I could conceivably go on “recession watch” for the economy as early as the end of this month.

Jobless claims continue to suggest weakness but no downturn

 

 - by New Deal democrat

We finally have some new data this week - the usual, jobless claims.

Initial claims declined -5,000 for the week, while the four week moving average declined 5,750. With the usual one week delay, continuing claims, on the other hand, rose 10,000 to a new 4.5+ year high of 1.965 million:

I can’t help but note that although the above numbers are seasonally adjusted, it is clear there is some residual unresolved post-pandemic seasonality nonetheless, as ever since the beginning of 2023 we have seen low numbers at the beginning of the year, rising through midyear, and then falling back down through the Holiday season.

On the YoY% change more useful for forecasting, initial claims were up 2.3%, the four week moving average up 1.3%, and continuing claims up 5.9%:

This continues to forecast weakness, but no recession. Interestingly, while there has been no substantial increase in new layoffs, those who are out of work are finding a more difficult time finding new jobs, as is shown by the increase in continuing claims in the last 8 weeks. Also, it is possible the recent lower figure for YoY% increases in new jobless claims might suggest a break in the trend of 5% higher +/-5% we’ve seen since last autumn, but I suspect it is more likely just noise.

Finally, here is an updated look at what this suggests for the unemployment rate going forward:

While most recently the unemployment rate was unchanged from 12 months previous, jobless claims suggest that this comparison should trend higher by about 0.2% or 0.3% in the next few months. A year ago the big increase in the unemployment rate was likely due to the torrent of new immigrants looking for work. Needless to say, this year that is very much not likely to be true any longer.

Why goods-producing employment is not flashing a danger signal for an economic downturn

 

 - by New Deal democrat

During this week’s drought of new economic data, let’s continue taking a look at some important information from last Friday’s employment report.

In every report, I break down my analysis first and foremost by looking at the leading indicators contained within the data. This is almost entirely confined to the goods-producing sector, and in particular manufacturing and construction. That’s because the goods sector is more volatile than the services sector. The former almost always turns down before the onset of a recession, while the latter in many cases sails right through.

Specifically, let me show you the last 40+ years of the absolute levels of employment in the goods-producing sector (blue) vs. services (red), broken up into three periods.

First, here is 1983-2000:

Here is 2000-2019:

And here is the post-pandemic period:

In each recession (except for COVID) since 1982, employment in the goods producing sector has turned down up to a year or more before the actual onset of the contraction, while at most the addition of jobs in the service producing sector slowed down. At present, as you can see from the last graph, while growth in the goods-producing sector has all but halted, it has not yet turned down.

Now let me break down employment within the goods-producing sector into manufacturing, construction, and the more leading residential construction sub-sectors, in addition to the entire goods-producing sector (red), first in absolute terms with all normed to 100 as of February 2023, which is when manufacturing employment peaked:

Recall that since the admission of China to regular trading status in 1999, a downturn in manufacturing has not been enough to drag the economy into a recession. You can see that construction employment, and in particular residential construction employment, which has risen almost 5% since then, has been responsible for the resilience in the overall sector.

Now let’s look at the same data YoY:

While the overall sector is up only 0.1%, manufacturing employment is down -0.7%, but construction employment is up 1.5%, and residential construction employment up 1.7%.

Now let’s take a look at the historical pre-pandemic YoY data. In the below graph, I have added/subtracted from each subsector’s YoY%age the June 2025 reading, so that each crosses the zero line when they correspond to the present:

Note that with the exception of the construction sector as a whole in 2001, all of the subsectors were lower YoY than their current readings at all times before each recession except for COVID. This tells us that there would have to be a further decline in manufacturing employment, and an actual significant turndown in residential construction employment (in 2001 overall construction employment stalled but did not decline) to create the conditions we have had just before all of the last three non-COVID recessions during the past 40 years.

This also hopefully helps explain why several important metrics, like the economically weighted ISM indexes are flashing a “recession watch,” I have not hoisted that flag for my overall forecast.

Two important danger signals in the June employment report

 

 - by New Deal democrat

This is Ben Casellman, Chief Economic Correspondent for The NY Times’s take on last Friday’s employment report:

I beg to differ. As I wrote Friday, underneath the headlines, this was a barely positive report - with some significant negatives. Let me point out a couple of the big ones today.

The headline was 147,000 jobs added, about average for the past year:

So it’s all good, right? 

Not so fast.

That 147,000 breaks down to 74,000 private jobs + 63,000 education (and 10,000 other). In the past six years, only 3 other times have public sector jobs (including education and all other government jobs) been such a large component of the total gain:

And the simple reason is that education employment is highly seasonal, with layoffs in May through July, and rehiring in August through October, as shown in the below graph where the non-seasonally adjusted numbers are in light blue, the seasonally adjusted ones in dark blue - and even then, I’ve had to divide the NSA numbers by 2 just to avoid the SA numbers being reduced to squiggles:

In June, “only” 271,000 education jobs were lost, which translated to a 63,000 SA gain. As one of Casselman’s correspondents pointed out, that may have to do with the fact that June started on a Sunday, so the reference week for the payrolls report was particularly early, and many school districts may not have ended their school year yet. In any event, regardless of the reason, that 63,000 gain is almost certainly going to be “paid back” next month.

So how bad really is a 74,000 private sector gain?

In the entire decade-long expansion before COVID, there were only 5 times that private sector jobs had fewer than 74,000 gains:

And there have only been 6 such times since the pandemic:

Now let’s zoom out a little bit. In the first 6 months of this year, 644,000 new private sector jobs have been created, plus 138,000 government jobs. Here’s how that compares with the entire 40 year history before COVID:

And here is how it compares post-pandemic:

In the entire 45 year period, *not once* has there been such anemic private sector growth in one half of the year except for during, just after, and the half year just before recessions.

Further, as shown above, private sector job growth tends to be slightly leading. That’s basically simple arithmetic, because total employment is a classic coincident indicator, while government employment lags. That’s because government entities generally have to balance their budgets, and for the first 3 to 12 months of a recession, they base hiring on the prior year’s tax receipts. Since during a recession, those receipts go down, governments have to make cuts that last up to several years after the recession is over.

Here’s the historical view of just public sector employment (the same as in the above) in two graphs:

And here is the post-pandemic view:

In each case government job losses continued for up to two years after the end of the recessions, and sometimes continued to increase during the early parts of the recession themselves. In other words, the early losses were concentrated in the private sector.

Put another way, when private sector employment gains wane, that is a warning signal. And private sector gains have waned so far this year.

I think that’s a little more than squint-worthy.

Before I finish, let me update another important graph. Below is nominal aggregate nonsupervisory payroll growth (red) compared with CPI (orange), together with real aggregate nonsupervisory payrolls (blue) through May (since we don’t have June’s CPI number yet), all normed to 100 as of March:

Nominally, aggregate nonsupervisory payrolls have only risen 0.3% since March, while consumer prices have risen that same percentage just through May. In other words, real aggregate payrolls look like they have been peaking this spring. And as I have pointed out many times in the past, a peak in real aggregate nonsupervisory payrolls has been an excellent metric for forecasting a downturn in real consumer spending, and with it, a recession.

So, far from being healthy or “resilient,” as Casselman contends, the June employment report had a number of important danger signals, only the most important of which I have detailed here.