September consumer inflation: headline closing in on the Fed’s target, shelter decelerates, medical services become a problem child

 

 - by New Deal democrat



Today’s CPI report for September came in almost exactly as I suggested it would in my preview yesterday. To wit:

 - Headline CPI continued increased 0.2% for the month, and decelerated to 2.4% YoY, its best showing since February of 2021. 

 - On a 3 month annualized basis, prices are increasing 2.1%. On a 6 month annualized basis, they are only increasing 1.6%. 

 - energy inflation remains non-existent, with another decline of -1.9% for the month, resulting in a decline of -6.9% YoY.

-  excluding shelter, prices were also up 0.2%, and were once again up 1.1% YoY, the 17th month in a row the YoY change has been below 2.5%.

 - shelter inflation decelerated sharply for the month, up only 0.2%, tied for the least increase in 3 years, and up 4.8% YoY, the lowest YoY increase since February 2022.

- but core inflation, which includes shelter but excludes gas and food, remained elevated, up 0.3% for the months and 3.3% YoY, an increase of 0.1%.

Let’s break this down graphically to better show the trends.

Here are headline (blue), core (red), and ex-shelter (gold) inflation YoY:

Yet again, the only reason for the Fed not to treat inflation as well within its target zone is shelter.

The good news on shelter inflation this month puts it back on the deceleration track (blue in the graph below), and is in line with what we could expect vs. the FHFA Index YoY (red):

Now let’s take a look at the former and remaining problem children, plus why core inflation had a bump upward this month. 

The former problem child of new (dark blue) vehicle prices declined -0.1% this month and are down -1.3% YoY. Used (light blue) vehicle prices rose 0.3% and are down   -7.5% YoY (shown as the change since right before the pandemic, below). I also show average hourly nonsupervisory wages (red) for comparison, showing that wage growth has actually outpaced vehicle prices (meaning the remaining problem there is interest rates for financing):

Note again that used vehicle prices have given back over 50% of their post-pandemic gain.

Next, here’s a look at the remaining problem children. Electricity (gold) gained back the 0.7% it declined one month ago, but decelerated to being up 3.7% YoY, a six month low. Food away from home (blue) increased 0.3% again, and is up 3.9% YoY. Finally, transportation services including vehicle maintenance, repair, and insurance (red) increased 1.4%, the most in six months, and is up 8.7% YoY, an acceleration of 0.8% from last month:

This is the first month that both electricity and food away from home have been below 4% inflation YoY post-pandemic. As I have previously pointed out, transportation services inflation is a typical delayed reaction to the previous big increase in vehicle prices.

If several of the old problem children are fading, a new one - medical care services - appeared this month, increasing 0.7%, tied for the biggest increase in two years, causing the YoY% gain to increase to 3.6%, the highest in 21 months:

Finally, the CPI release allows me to update the very important metric of real aggregate nonsupervisory payrolls, which as anticipated increased 0.2% and once again made a new record high, up 8.2% since just before the pandemic:

To reiterate, there has *never* been a recession without real aggregate payrolls turning down first.

In conclusion, this was in almost all respects a good inflation report, with headline inflation closing in on the Fed’s 2% target, and the shelter component resuming its deceleration. The only fly in the ointment was the persistent 3%+ level of core inflation, which was hurt by the increase in medical care expenses.

Initial jobless claims: welcome back to hurricane season

 

 - by New Deal democrat

Step away from the ledge, everybody; and pay no attention to the DOOOMers, who are surely out in force this morning: the big increase in initial claims was almost all about Hurricane Helene.

By the numbers, initial claims increased 33,000 to 258,000, the highest number since August 2023. The four week moving average increased 6,250 to 231,000, the highest in a month. Continuing claims, with the usual one week delay, increased 42,000 to 1.861 million, the highest since mid-August:

On a YoY basis, initial claims were up 22.3%, the four week average up 8.7%, and continuing claims up 3.4%:

I won’t bother with the “Sahm Rule” unemployment rate comparison this week, partly because this is only the first week of the month, and partly because of what I discuss below.

If there were no special factors, I would be very concerned about a jump In claims as occurred this week. But my very first thought when I heard the numbers was, “Was there a natural disaster last week?” And of course there was, in the form of Hurricane Helene, which hit the panhandle of Florida with a record storm surge before pummeling the southern Appalachians, especially western North Carolina.

So I immediately went to the table of state by state changes, and here are the five biggest increases (*not* seasonally adjusted) in state level claims for last week:

MI +9,490

NC +8,534

CA +4,484

OH +4,328

FL +3,842

For contrast, here are the other two big States:

TX +1190

NY +544

I’m not sure what the story was in Michigan and Ohio, but it’s pretty clear why North Carolina had such a big jump. Neighboring TN, also impacted by Helene, also increased by +1,836. NC and FL alone were responsible for 23% of the entire non-seasonally adjusted increase of 53,570. 

We have seen similar increases after past hurricanes. In 2005, claims increased 96,000 just after Katrina. In 2012, they increased 81,000 right after Sandy. And in 2017, they jumped 50,000 immediately after Harvey. In all these cases, the big increases were in the States most impacted by the storms.

All of which means that next week we can expect to see a further sharp increase, driven by more Florida claims in the aftermath of Milton. We’ll see what happens with Michigan and Ohio, but unless I find a specific reason for their jump, I’ll expect a decline back to normalcy there.

So take a deep breath. Initial jobless claims are not signaling recession this week. They are signaling hurricane season.

Real aggregate payrolls and inflation preview for September

 

 - by New Deal democrat

Tomorrow consumer prices for September will be reported. It’s almost certain that the best short term forecasting tool from the employment report, real aggregate payrolls, will increase once again. Let’s take a more detailed look.

Post-pandemic, nominally aggregate payrolls have increased relentlessly. Consumer prices increased almost as relentlessly until June 2022. Since then payrolls have continued to increase faster than prices (graph below norms both series to 100 just before the onset of the pandemic):

Here’s the month by month look for the past year. In all but two of the past twelve months, payrolls increased significantly more than consumer prices - meaning that, consumers had more payroll income, in real terms, available to spend. In September, it is almost certain that trend will continue, with aggregate payrolls increasing 0.4%:

Consumer inflation has mainly been a function of two things: gas and shelter. 

In September, gas prices decreased -5.2% (dark blue in the graph below). This typically means a change in the energy component of CPI of about -2.7% (light blue).  And since energy is about 7% of the total weighting for CPI, dividing gas prices by 14 gives us a ballpark estimate of total CPI (red), keeping in mind that over time the more stable portions of the average increase about 2% a year:

All else being equal, i would expect CPI tomorrow to be close to unchanged or even down -0.1%.

But as I have discussed ad nauseam for the past several years, the huge house price increases in 2021-22 have translated, with a 12+ month lag, into very large increases int he shelter component of CPI, which is 25% of the entire index. Here’s what the YoY% changes in gas, energy, shelter, and the total index look like post-pandemic:

Shelter inflation has been decelerating for the past 16 months. That should continue tomorrow, as new rents continue to decline slightly YoY as shown by the most recent installment of the Apartment List National Rent Report:

Since many tenant leases are longer than 12 months, CPI has followed suit much more slowly. But the trend of deceleration should continue tomorrow, particularly as last September CPI for rents increased 0.5% for the month. Since then the monthly increases have generally been 0.2%-0.4%.

The bottom line is that September CPI tomorrow is likely to be somewhere between unchanged and 0.2%, and that will mean that once again in real terms consumers had more money to spend in September than ever before. And that means the economic expansion will continue at least for a few more months.

An in-depth look at the leading indicators from the employment report

 

 - by New Deal democrat

First things first: there’s almost no significant economic news at all this week until Thursday, so don’t be surprised if I play hooky for a day or two.

The coincident headline news out of last Friday’s employment report was very positive, so most all observers heaved a sigh of relief. Of course, precisely *because* it is coincident, it could all be reversed next month, or by next month’s revisions to Friday’s data.

But since I am all about leading indicators and forecasting, let’s take a deeper look at those indicators from Friday’s report.

First, a little perspective. Recall that last week I was writing about manufacturing and construction. The former has been showing at least mild contraction for many months according to most measures, while the latter has continued to grow. I pointed out that for an economic downturn, I’d be looking for both to contract in tandem. The service sector for many decades has tended to expand in all but the deepest recessions. So it’s only when the goods sector as a whole turns down that there is enough downward pressure to pull the economy generally down with it. Which is why, when we had the very good ISM services report on Thursday, which showed that the economically weighted average of manufacturing and non-manufacturing remained expansionary, I was relieved.

So, with that background let’s look at the manufacturing, construction, and other leading indicators from the jobs report.

Turning to manufacturing first, here are all employees in the sector (blue, left scale, normed to 100 as of their recent peak) vs. the average manufacturing workweek (red, right scale), and manufacturing production (gold, left scale, also normed to 100 as of their recent peak) from the industrial production report:

Manufacturing hours have been part of the official Index of Leading Indicators for many decades. That’s because factories cut back hours before they actually lay off employees, so they are the proverbial “canary in the coal mine.” Hours declined sharply in 2022, but have stabilized in the past 18 months except for a downturn last Holiday season. 

Production peaked later in 2022, but has also stabilized in the past 18 months. The number of manufacturing sector employees, meanwhile, continued to very gradually increase until peaking this past January. It has declined -0.4% since.

A historical look shows that while this is consistent with weakness, it is not recessionary:

Manufacturing employment in the past 40 years has typically declined by -5.0% or more before a recession has begun, and hours have declined sharply below an average of 40.5 per week. This year hours have stabilized at about 40.7.

Turning to construction, both total jobs in that sector and the even more leading housing construction jobs continued to increase to new post-pandemic highs in Friday’s report. In the case of the latter, it was also a 15+ year high; for the latter it was also an all-time high:

Note that housing construction jobs have always turned down first, and many months before the last three recessions before the pandemic. Total construction jobs also peaked before two of the three pre-pandemic recessions, although somewhat later.

Needless to say, this is very positive.

As I wrote last week, housing construction employment (red) tends to peak after housing units under construction (dark blue, right scale) does, sometimes by many, many months. It also has only peaked after housing units actually completed (light blue, left, /2.5 for scale) has peaked as well:

While the sharp decline in housing units under construction in the past few months remains a considerable concern, housing units completed has continued to increase, just as sharply. So it appears we have at least a few more months to go before residential building employment might turn down.

Several of the other leading indicators in employment are not faring so well.

Temporary help was an excellent leading indicator before each of the last three pre-pandemic recessions. Post-pandemic it peaked in early 2022 and has been declining sharply for 2.5 years ever since. Trucking employment, meanwhile, flattened out and sometimes declined before the previous recessions. It has also been declining for two years (the sharp decline one year ago was caused by the bankruptcy of one major trucking firm):

I suspect there are unique factors having to do with the severe “overshoot” in temporary employment right after the pandemic, and employers’ hoarding existing help thereafter, which make this series unreliable this time around (remember, no indicator is perfect!). Trucking is of somewhat more concern, and seems to mirror the downturn in manufacturing production we saw in the first graph above. 

Another such indicator is short term unemployment (less than 5 weeks). This series is similar to, but predated the tabulation of initial jobless claims by several decades. Its drawback is that it is much noisier, meaning there are many more false positives or false negatives, as shown in the historical graph below:

Here’s the post-pandemic view, with each series normed to 100 as of their lowest levels (in the case of unemployment, the lowest three month average):

As you can see, the four week average of initial jobless claims gives a much cleaner and less noisy signal, although as I point out weekly, there appears to be some residual post-pandemic seasonality.

Finally, let’s look at goods employment as a whole. The long term historical look shows that, with the exception of 1974 (the first oil shock) and 1982 (caused by quick sharp Fed rate hikes), goods employment has always peaked at least several months before a recession:

Goods employment also continued to increase to a new post-pandemic high last month, although the gains are decelerating, currently to +0.9% YoY. So let’s look at the YoY% situation, and subtract -0.9%, so that the current level shows at the zero line:

Before the 1980s, a sharp decline to this level of YoY growth almost always meant an imminent recession. But in the past 40 years since the early 1980s, this has been consistent with at least weak economic growth, and for much of the period it has been average.

To sum up, there are some legitimate areas of concern in the leading indicators from the jobs report, mainly trucking and short term unemployment. There are several other weakly negative or neutral leading indicators: manufacturing employment and hours. But the main tone remains positive, if weakly so, mainly due to the continued strength in the construciton sector, which is boosting goods production employment as a whole. 

So long as construction employment, and in particular residential construction employment, holds up, the economy will remain in decent shape.

Weekly Indicators for September 30 - October 4 at Seeking Alpha

 

 - by New Deal democrat

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

There was a slight fading of several indicators in the short leading and coincident sphere, but overall the positive and improving trend continues.

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 organizing and presenting it to you.

September: very much a “soft landing” jobs report. But will the Fed use this to fall behind the curve again?

 

 - by New Deal democrat



Especially in view of the relative weakness in the jobs report for the past few months, my focus continues to be on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether there is further decline towards a recession. 

For this month at least, the verdict was clear: both the Establishment and Household Surveys pointed to “soft landing.”

Below is my in depth synopsis.

HEADLINES:

• 254,000 jobs added. Private sector jobs increased 223,000. Government jobs increased by 31,000. 
• For a change, there were *upward* revisions to the last two months. July was revised upward by 55,000, and August by 17,000, for a net increase of 72,000. This breaks with the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 430,000 jobs. On a YoY basis, this series has only risen by 314,000 jobs, which remains consistent with recession, as it has for months. On the other hand, it is an improvement from last month, where there was an actual YoY decline.
• The U3 unemployment rate declined -0.1% for the second month in a row, to 4.1%, which also means the “Sahm rule” recession indicator, for the first time in three months, is no longer in effect.
• The U6 underemployment rate fell -0.2% to 7.7%, still 1.3% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose another 60,000 to 5.97 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. This month they were mixed:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators,  was unchanged at 40.7 hours. This remains down -0.8 hours from its February 2022 peak of 41.5 hours, but on the other hand is only 0.1 hour below its 18 month high.

• Manufacturing jobs declined -7,000.
• Within that sector, motor vehicle manufacturing jobs declined -6,500. 
• Truck driving declilned -700.
• Construction jobs increased 25,000.
• Residential construction jobs, which are even more leading, rose by 2,000 to another new post-pandemic high.
• Goods producing jobs as a whole rose 21,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -13,800, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer declined -322,000 to 2,146,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.08, or +0.3%, to $30.33, for a YoY gain of +3.9%. This continues the trend of deceleration from their post pandemic peak of 7.0% in March 2022, and was less than 0.1% higher than its post-pandemic low set in July. Most importantly, though, this continues to be significantly higher than the 2.6% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.2%, and is up 1.2% YoY, in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was rose 0.4%, and is up 5.2% YoY. These have been slowly decelerating since the end of the pandemic lockdowns, and that trend continued this month, which was tied for the post-pandemic low. Nevertheless, with the latest YoY consumer inflation reading of 2.6%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment rose 17,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.5% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions. On the other hand, there has been no meaningful further YoY deterioration in the past 12 months.
• The employment population ratio rose 0.2% to  60.2%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate also remained steady at 62.7%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declined -0.1% to 83.8%, vs. 84.0% in July, which was the highest rate during the entire history of this series except for the late 1990s tech boom.

SUMMARY

Last month I wrote that “Along with the big downward revisions to the last several months, this month’s report is the first time that there is substantial evidence that the jobs market may have moved past a ‘soft landing’ into a hard slowdown that could easily tip over into outright declines by the end of the year.” 

This month’s report completely reversed that. Not only were the headline numbers all good, but there were positive revisions to the past several months. Average middle and working class workers continue to see good wage and hourly increases in pay, with real inflation-adjusted increases to buying power. And the headline Household survey employment number joined in the good news for a change.

Not everything was rosy. To reiterate what I wrote last month, “manufacturing seems at long last to have rolled over,” with the third decline in four months. The sector has shed -0.4% of its total so far this year. Trucking continues to slowly shed jobs as well. This isn’t recessionary compared with the last 30 years, but it is weak. At the further edge of the spectrum, those who haven’t looked actively but want a job now increased close to a 24 month high.

But the construction sector continues to do well, including - surprisingly - residential construction jobs, despite the downturn in housing construction metrics. Short duration unemployment declined, mirroring the recent downturn in initial claims.

To reiterate my opening statement, for this month at least the “soft landing” scenario is fully intact. If there is a concern, it is that the Fed, which has been behind the ball for about 3 years, will take this as a sign that it can maintain high interest rates, despite the fact that it has to make policy for the jobs sector one year from now, not for last month.