Weekly Indicators for February 27 - March 3 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

A number of indicators which had been declining have stabilized since the beginning of the year, leading to increased speculation about a “soft” landing or even a “no landing” at all. The bulk of the long and short leading indicators beg to differ.

As usual, clicking over and reading will fill you in on all the details of both the forecasts and the nowcast, and reward me a little bit for putting the information all together in an organized format for you.

Real final sales and inventories as portents of recession

 

 - by New Deal democrat

As I have mentioned previously from time to time, I read people who have interesting things to say even if their worldview is very different from mine. One such person is Mike Shedlock, a/k/a Mish. He’s an aggressive libertarian and has a long track record as a Doomer, but he frequently parses some thought-provoking economic data. It makes me think, even if I ultimately disagree, and that’s a good thing.

As you might imagine, for the past year he’s been talking about an ongoing recession. Not so noteworthy. But about a week ago he parsed Q4 GDP and pointed out that, when you take out inventories, real final sales and in particular real final sales to domestic purchasers looked extremely close to recessionary levels.

So I took a look, and here’s what I found.

First of all, here are real final sales (red) and real final sales to domestic purchasers (blue) for the last 8 quarters, both normed to 0 as of their Q4 2022 readings for ease of comparison:

Not exactly scintillating, but not negative either.

Now let’s look at the historical record, going all the way back to their start in 1947. Below I split up the series into 3 equivalent time periods, omitting 2020 (so that they’re not just squiggles) and, as with the graph above, normed both series to 0 as of their Q4 2022 readings:

There are lots of false positives (i.e., recession signals) if we rely on just one of the two series being as low Q/Q as they were in Q4 2022. But if we sort out when *both* were at readings that low, we get a much more interesting signal.

In *every* recession (of the 12 since the end of WW2), there was at least one quarter where both readings were as low or lower as they were in Q4 2022. Further, frequently they both turned negative 1-3 quarters before a recession began. If we take those out, there are only 5 false positives, and 3 of those are in the late 1940s and 1950s. In the past 60 years, there have been only 2 false positives, in 1966 and 1987, which were deep slowdowns that didn’t quite turn into recessions. 

So the deep slowdown in real final sales and real final sales to domestic purchasers in Q4 is telling us that the economy was by no means out of the woods.

One important difference over the years is how quickly producers responded to changes in demand by increasing or liquidating inventory. Before 1992, there was a consistent and demonstrable lag:

In other words, suppliers continued to build up inventory for a quarter or more after sales turned down. To eliminate this build-up, they cut production and also the workers on the production line.

Since 1992, with the “just in time” inventory model, frequently with overseas suppliers, inventory liquidation has happened more quickly and with a far less severe impact on sales:

Given the problems with the “just in time” model exposed by the pandemic, producers may be reverting to a more conservative “just in case” model, which will require steeper inventory reductions again. 

Before the first estimate of Q1 2023 GDP at the end of April, we’ll get January and February business sales and inventories, which will give us some information as to what is happening with inventories, and whether the Q4 weakness in real final sales was indeed a portent of recession.

Jobless claims: the situation remains, ‘all system go’

 

 - by New Deal democrat

Initial jobless claims declined -2,000 last week to 190,000, while the 4 week moving average increased 1,750 to 193,000. Continuing claims, with a one week delay, increased 5,000 to 1,655,000. All of these remain excellent numbers:

To repeat my meme over the past year, virtually nobody is getting laid off. It’s almost impossible to have an economic downturn with that kind of evidence.

To wit, on a YoY basis, while the past one week and continuing claims are both slightly higher, the crucially important 4 week average remains lower:

Unless and until the 4 week average goes higher YoY by at least 10%, this series is not even worthy of a yellow flag. For now when it comes to employment, it remains ‘all systems go.’

February manufacturing and January construction continue negative, while auto sales improve

 

 - by New Deal democrat

We started out yet another month of data with bad news in two leading sectors.

The ISM manufacturing index has been showing contraction since November, and its more leading new orders subindex since September. And did so again in February, with the total index increasing slightly to 47.7, and the new orders index rebounding from a horrible 42.5 to 47.0. But because both of these numbers are below 50, they still show contraction:

In the past, the ISM has said that numbers below 48 have been most consistent with recession. 

Meanwhile, construction spending for January also declined by -0.1%, and the more leading private residential construction spending declined by -0.6%:

Even after factoring in the prices for construction materials, which declined -0.1% in January, “real” residential construction spending declined -0.5%:

Finally, in a bit of relatively good news, it appears that the crunch in motor vehicle production may have eased somewhat, as in January 15.7 million autos and light trucks were sold on an annualized basis, the highest number since June of 2021 (the below graph norms that to 0 to better show comparisons):

A more typical expansionary reading before the pandemic would have been between 17.0-18.0 million units annualized, so this is still a shortfall, but is much closer to a normal range than we have seen in the past year.

When February payrolls are reported a week from this Friday, the leading sectors of manufacturing and construction jobs, neither of which has turned down as of now, will be of special importance.

Housing prices continue to come down - like a feather

 

 - by New Deal democrat

As I’ve repeated many times in the past 10 years, in housing prices follow sales with a lag. Housing permits and starts both peaked early in 2022, and house prices followed during the summer.

This morning the FHFA and Case Shiller house price indexes for December showed continued declines both on a monthly and YoY basis, continuing to presage a similar decline in CPI for shelter by the end of this year.

Here is what both look like normed to 100 as of their June peaks:

The FHFA index is down -0.9% since then, and the Case Shiller national index down -2.7%.

Notice that between June 2020 and June 2022, both indexed increased by an average of over 1% a month, but have declined at a much smaller rate. In other words, in the aftermath of the pandemic house prices shot up like a rocket, but to date are only drifting down like a feather.

The YoY comparisons, on the other hand, are getting much better. At their peaks during spring 2022, both measures of house prices were up about 20% YoY. As of December, the FHFA is down to +6.6% YoY, and the Case Shiller index +7.6% YoY:

If this rate continues, YoY prices will turn down later this spring.

As I have been emphasizing for over a year, house prices lead the CPI measure of Owners’ Equivalent Rent by 12 or more months. Here is the last 20 year history of the YoY% change in the FHFA Index (red, /2.5 for scale) vs. Owners’ Equivalent Rent YoY (blue):

The good news is that the CPI measure for housing continues to be on track to decline to about 3%-3.5% YoY by about the end of 2023, close to if not within what ought to be the Fed’s comfort range. 

Unfortunately we probably have a few months to go before the official measure of CPI for shelter peaks, likely at 8.0% or higher.

Finally, let’s take a look at households’ ability to make the down payment (leaving mortgage rates aside for this purpose). As shown in the below graph which norms house prices by the average weekly paycheck for nonsupervisory workers, house prices are still  only -3.0% below their all time high, set last May:

So even if prices moderate further as this year goes on, which is likely, housing is still going to be very expensive relative to historical norms.

Durable goods orders: more deceleration, still no recession

 - by New Deal democrat

I normally don’t pay too much attention to durable goods orders. That’s because they are very noisy. They don’t always turn down in advance of a recession (see 2007-08), although they may at least stall, and there are a number of false positives as well (see 2016) as shown in the graph below showing up until the pandemic:

But in 2022 they were one of the last short leading indicators to be positive. As late as November of last year I still rated them as a “positive.”

That has changed somewhat in the past several months. With the exception of December, durable goods orders have made no progress at all since last June, and while “core” durable goods orders excluding aircraft (Boeing) and defense increased in January, it remains below the level of last August, and has generally been flat since then as well:

A YoY view shows that both measures of durable goods are decelerating, but neither are have deteriorated as much as before the last 3 recessions:

But if they continue at their current rate of deceleration, core capital goods will be negative YoY by about mid year.

This has been a dominant theme in the data - especially some short leading and coincident indicators - for the past number of months: continuing deceleration, but not turning negative yet.