August personal income and spending: major downward revisions overwhelm modestly positive monthly grains

 

 - by New Deal democrat

This morning’s personal income and spending report for August was positive month over month both in nominal and real terms, but the major story was in the revisions.

Personal spending is the essentially the opposite side of the transaction of retail sales. Both have been tracking relatively closely since the end of the stimulus-fueled spring spending spurge of 2021, as shown in the m/m% changes below:

Real personal spending was up +0.1% in August, compared with +0.2% for real sales. 

So far, so good. But as you can see from the above graph, real personal spending has all but stalled since April.  Compared with the average spending in Q2, the first two months of Q3 are only up +0.1% - which while positive is seriously weak.

Real personal income also increased less than +0.1%, rounding down to unchanged. Since May 2021, real spending has increased +2.8%, but real personal income is *down* -2.2%:

This reflects a major downward revision in income for the past year. Here’s last month’s graph, showing real personal income only down -1.0% since May 2021:

With this revision, we just got a big part of the explanation for why consumer confidence (and President Biden’s approval ratings) took such a hit earlier this year.

The same revision seriously affected the personal saving rate, which was unchanged for the month at 3.5% (shown as zero in the graph below for better historical comparison):

As revised, the saving rate has been close to all time lows for most of this year. Only 2005-08 were lower.

Here’s the same graph from one month ago, showing July’s saving rate as 5.0%, generally equivalent to the early 2000s:

But no more!

Usually the personal saving rate declines progressively during expansions, leaving consumers more and more vulnerable to negative shocks. With the revisions to the past year’s data, we are very much in that territory. If there is , e.g., another gas price spike, consumers’ luck will probably run out.

The positive trend in jobless claims continues

 

 - by New Deal democrat

For still another week, initial jobless claims continued their recent downtrend.

Initial claims declined -16,000 to 193,000, a 5 month low. The 4 week average also declined -8,750 to a new 4 month low of 207,000. Continuing claims, which lag somewhat, declined -29,000 to a 2.5 month low of 1,347,000:

The downtrend of the past 2 months is almost certainly a positive side-effect of lower gas prices. According to GasBuddy, gas prices have increased in the past 10 days. If gas prices stabilize, I expect jobless claims to do so as well.

But this is good news and very much at odds with the idea that the US is currently in a recession.

Interest rates, the yield curve, and the Fed chasing a Phantom (lagging) Menace

 

 - by New Deal democrat

There’s a lot going on with interest rates in the past few days.

Mortgage rates have increased above 7%:

This is the highest rate since 2008. Needless to say, if it lasts for any period of time it will further damage the housing market.

The yield curve has almost completely inverted from 3 years out (lower bar on left; upper bar shows a similar curve in April 2000, 11 months before the 2001 recession):

As of this morning, the curve is normally sloped from the 3.12% Fed funds rate up through the 3 year Treasury, which is yielding 4.22% (which, as an aside, is a mighty tasty temptation to buy medium maturity bonds). Beyond that, with the exception of the 20 year Treasury, each maturity of longer duration is yielding progressively less. If this is like almost all recessions in the last half century, the short end of the yield curve will fully invert (i.e., Fed funds through 2 years as well) before the recession actually begins. Although I won’t show the graph, the yield curve *un*-inverted before the last two recessions even began, immediately or shortly after the Fed began to lower rates again.

On the issue of rents, house prices, and owners equivalent rent, Prof. Paul Krugman follows up on the fact that OER is a lagging measure. Today he touts the monthly decline in new rental lease prices as possibly signaling a downturn in inflation:

He’s referring to the “National Rent Index” from Apartment List, which Bill McBride has also been tracking. Because it tracks rents in only new or renewed leases, it picks up increases or decreases more quickly than those indexes that measure all rentals (including those that were renewed, e.g., 9 months ago).

I don’t think the index is quite the signal Paul Krugman does, because it is not seasonally adjusted, and rents typically decrease in the last 4 months of each year:

Here is the cumulative yearly index for each of the past 5 years:

The -0.1% non-seasonally adjusted decrease in September this year is on par with that of 2018, and less of a decline in September 2019 or 2020. For the first half of this year, rents were increasing at a faster, and accelerating, rate compared with 2018 and 2019. Since June have rent changes been comparable with (and not more negative than) those two years.

I thought I would compare Apartment List’s with with the Case Shiller house price index, below:

Note that house prices broke out to the upside YoY beginning in late spring 2020, while apartment rents did not do so until early 2021. There were rent increase moratoriums in place during the pandemic, which may have affected that comparison. Still, it is cautionary that for the limited 5 year comparison time we do have, house price indexes moved first.

Finally, what would the Fed have done if it had used the Case Shiller index instead of owners equivalent rent in its targeted “core inflation” metric?

Via Mike Sherlock, here’s what the “Case Shiller [total, not core] CPI” looks like through last month:

Here’s another way of looking at the data, comparing the monthly % changes in the Case Shiller national house price index (blue), owners equivalent rent (red, right scale), and core CPI (i.e., minus food and energy) (gold, right scale):

Rent + owner’s equivalent rent are 40% of core inflation. Unsurprisingly, core inflation tends to track similarly to OER. But between May 2021 and May 2022, OER only averaged +0.4% monthly, whereas the Case Shiller index increased 1.5% on average monthly. If 40% of core inflation increased at 1.5% monthly instead of 0.4% monthly, core inflation would have on average been +0.4% higher each month for that entire year.

In other words, the Fed would have had a much earlier warning that an upsurge in core inflation was not going to be “transitory.” 

By contrast, during the last 3 months of the period through July that we have house price index data, OER has averaged +0.4%, whereas house prices have increased on average +0.6%. This would have brought core inflation down by -0.1% each month. If we use the last two months, OER is +0.6% and house prices have been unchanged. Core inflation would have been -0.3% lower in June and July.

In fact, if the trend of the last several months continues, by year end OER is going to be higher than house price appreciation on a YoY as well as m/m basis. And while OER has been increasing, house price indexes have been decelerating. 

In other words, if the Fed keeps raising rates, it is most likely chasing a phantom menace, a lagging indicator the leading measures for which will have already peaked and come down sharply.

House price indexes: more evidence of a summer peak

 

 - by New Deal democrat

The Case Shiller and FHFA house price indexes were updated through July (technically, the average of May through July) this morning. Ordinarily I do not pay them too much mind, but this year they are very important in confirming a peak in house prices.

Although the FHFA index is seasonally adjusted, the Case Shiller index is not, so the best way to show them in comparison is YoY. Here are YoY% changes for the last 2 years of each through June (FRED has not yet posted today’s numbers):

Remember, my rule of thumb for non-seasonally adjusted data is that the peak is most likely when the YoY gain declines to only 1/2 of its maximum in the last 12 months. the YoY peak in the Case Shiller index was +20.6% in March and April. The peak for the FHFA index was 19.3% in July 2021. By that standard, although both decelerated to 12 month lows, at +15.8% and 13.9% respectively, neither has actually turned down, although the FHFA index is closer. And since the FHFA has a tendency to turn slightly ahead of the Case Shiller index, this strongly suggests that a sharp deceleration in the Case Shiller index YoY will start within a month or two.

As I said above, however, the FHFA purchase only index *is* seasonally adjusted, and that index, after increasing consistently by 1% or more from June 2020 through May 2022, declined -0.1% in June, and -0.6% in July:

So the seasonally adjusted data in the FHFA Index indicates that prices did peak in May.

New home sales were also reported this morning. I’ll comment briefly on sales below, but let’s stick with prices first. These are also not seasonally adjusted. The median price of a new home YoY increased “only” +8.0% as of August, down from +24.2% in August of last year:

This confirms that new home prices have probably peaked as well.

Additionally, the maximum median YoY% change for existing homes in the past 12 months was last December at 15.8%. As of August the YoY increase was +7.7%, meaning those prices also probably peaked.

Summarizing the four measures of house prices, median prices of both new and existing homes appear to have peaked this summer. The FHFA Index suggests a peak either also happened this summer or is happening imminently. Only the Case Shiller index is probably several months away from peaking. 

Finally as to prices, as I have written many times over the past 9 months, the CPI measure of housing, “owners equivalent rent,” - which is about 1/3rd of the entire index -  lags actual house prices by about a year or more. Here are the YoY% changes of the house price indexes vs. OER (*2 for scale) over the past 20 years:

Through August, YoY% increases in OER have continued to accelerate. Since in the past episodes of significant downturns - 2001-2, 2005-6, and 2019-20, OER peaked about a year after the house price indexes, I suspect we will continue to see acceleration in OER through winter, or at least to the end of this year. 

Further, in several months I expect the YoY increase in the FHFA index to be less than that of OER - which means if the Fed continues to raise rates at that point, it will be chasing a receding phantom.

Turning briefly to new home sales, they increased sharply from July’s 6 year low of 532,000 annualized to 685,000, a 4 month high - but still well below the general pace of the past several years:

This data series is heavily revised, so we will see if the increase survives next month. There is no reason to suspect any change in the overall downward trend.

Gas and oil price update: good news and bad news

 

 -  by New Deal democrat

We’ll get some important house price information tomorrow, but there is no economic news of significance today, so let’s update gas and oil prices.

As indicated in the title, there’s good news and bad news. I’ll start with the bad news first.

According to GasBuddy, gas prices have not declined in over a week:

They have bounced off $3.64/gallon and stabilized at $3.66-7/gallon. Which still is only about $.20 higher than they were back in February.

But here’s the good news, in the form of a screen shot of oil prices this morning:

I have no idea whatsoever why oil prices suddenly declined further, or whether this will last, but as of now, oil prices are only about $3/barrel (or roughly $.06/gallon) higher than they were 1 year ago.

A comparison with the last year in gas prices:

suggests that, if oil prices continue in the $78/barrel range, gas prices will decline to roughly $3.25/gallon in the next several weeks.

Needless to say, if that happens, that is more money in the pockets of consumers to be saved, or spent on other things. It also means both consumer confidence and, politically, approval of President Joe Biden, will also increase - right before the midterm elections.