Weekly Indicators for July 31 - August 4, and long term forecast through H1 2024 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

No big changes in the data, but note that mortgage and other interest rates are up close to their peaks. This will operate to slow down growth in the housing market among other things.

As usual, clicking over and reading will bring you up to the virtual moment, and reward me a little bit for my efforts.

Also, earlier this week I did a comprehensive update of my long term forecast through the first half of 2024, which you can also find over there.

July jobs report: almost across the board deterioration in leading sectors

 

 - by New Deal democrat

My focus remains on whether jobs growth continues to decelerate, and whether the leading indicators, particularly manufacturing and construction jobs, as well as the unemployment rate (which leads going into recessions) have meaningfully deteriorated.

Almost all of these items did deteriorate in July.

Here’s my in depth synopsis.

HEADLINES:

• 187,000 jobs added, which would be the weakest monthly number since December 2020, except that last month was revised down to 185,000.
• Private sector jobs increased 172,000. Government jobs increased by 15,000
• May was revised lower by -25,000 and June by -24,000, for a total of -110,000. The three month moving average decreased to 218,000, the lowest since January 2021.
• The alternate, and more volatile measure in the household report rose by 268,000 jobs. The YoY% gain in this report is +1.9%.
• The U3 unemployment rate declined another -0.1% to 3.5% (still above the 3.4% low last year). The civilian labor force, the denominator in the figure, rose slightly (by 152,000), while the numerator, the number of unemployed, declined by -116,000.
• U6 underemployment rate declined -0.2% back to 6.7% 
• Further out on the spectrum, those who are not in the labor force but want a job now declilned -142,000 to 5.247 million, still well above its post-pandemic low of 6.5% set last December.

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.  These were almost all negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.1 to 40.6, equal to its lows earlier this year and down -0.9 hours from February 2022 peak of 41.6 hours.

• Manufacturing jobs declined by -2,000.
• Within that sector, motor vehicle manufacturing jobs declined -2,200. 
• Construction jobs increased by 19,000, in virtually every subsector except for residential construction.
• Residential construction jobs, which are even more leading, declined by -5,500. It continues to appear likely that January was the peak for this sector.
• Goods jobs as a whole rose 18,000. These should decline before any recession occurs. They remain up 1.7% YoY, which is a very good pace compared with most of the last 40 years.

• Temporary jobs, which have generally been declining late last year, declined further, by -2,200.
• the number of people unemployed for 5 weeks or less declined -54,000 to 2,004,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.13, or +0.5%, to $28.96, a YoY gain of 4.8%, a 0.1% uptick from its lowest YoY gain since June of 2021 set one month ago.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.2%, and is up 1.6% YoY.

•  the index of aggregate payrolls for non-managerial workers rose 0.6%, and increased 6.4% YoY, 0.2% higher than its 2+ year low set one month ago, and significantly above the inflation rate, meaning average working class families have more buying power.

Other significant data:

• Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose only 17,000, -352,000, or -2.1% below their pre-pandemic peak.
• Within the leisure and hospitality sector, food and drink establishments rose 13,400, but remain-64,400, or -0.5% below their pre-pandemic peak.
• Professional and business employment declined -8,000. This is the first decline in this important sector since the end of the pandemic lockdowns. This series had already been decelerating, and is currently up  1.6%, its lowest YoY gain since March 2021.
• The employment population ratio rose 0.1% to 60.4%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate was unchanged at 62.6%, vs. 63.4% in February 2020.

SUMMARY

This was a soft report (nevertheless quite positive by historical standards), which together with revisions to the last several months, marks another notch downward in deceleration. 

Almost all of the leading metrics were down. Employment in the entire goods sector has only shown gains due to transportation equipment manufacturing and non-residential construction. The comeback in leisure and hospitality jobs is much fainter. Professional and business jobs - one of the best paying sectors - may be rolling over. That revisions appear to be becoming routinely negative is also not a good sign.

The two bright spots in the report were un- and under-employment, which declined (contra the trend I expect them to take, based on the YoY increase in initial jobless claims) and wages. Average wage gains of 0.5% and aggregate wage gains of 0.6% in a month are very good for workers. Almost certainly they will exceed the monthly inflation rate once again. Because of these two things, this was absolutely not anything close to a recessionary report. 

But the slowdown almost across the board in leading sectors is akin to another compartment of a sinking ship flooding. Still, I do not think we get a recession until goods producing jobs as a whole decline. At their current pace of deceleration, that would be in about 9 months.

Jobless claims: a good example of why my forecasting discipline demands a confirmed trend

 

 - by New Deal democrat

Initial jobless claims for the last week of July rose 6,000 to 227,000. The 4 week average decreased -5,500 to 228,250. Continuing claims, with a one week lag, rose 21,000 to 1.7 million:

The YoY% change is much more important for forecasting purposes. There, initial claims were up 4.1%, the 4 week average up 5.8%, and continuing claims up 25.9%:

The behavior of initial claims in the past number of weeks has been an important example of why my forecasting discipline demands 2 months of continued readings higher by 12.5% or more for a valid signal. Many times in the past 50+ years there have been spikes higher than 12.5% which dissipated within 2 months, and did not correlate with an oncoming recession. Only when the increased number is durable does it create a valid red flag recession warning.

Needless to say, we had a “close but no cigar” spike in June. The downturn in cliams in July resets the clock.

Finally, especially in view of tomorrow’s jobs report, let’s update what this means for the Sahm Rule (an increase of 0.5% from the low in the 3 month average of the unemployment rate means that a recession has begun). 

On a monthly basis, the YoY% change in new jobless claims is higher by 8.1%. Claims have been higher YoY ever since March, and - as has been the case for 50+ years - the unemployment rate (red) is following with a delay::

Note that the unemployment rate in the above graph is depicted as the % change in a percentage number. One year ago the unemployment rate was 3.5%.

A 10% increase in the unemployment rate takes us to 3.8% or 3.9% in the coming months, as best shown in the below graph of the same information in absolute terms:

That doesn’t necessarily mean that the unemployment rate will increase month over month tomorrow, but it tells us of the underlying trend in the naar future.

As I have for many months now, I will be looking for further evidence of deceleration in job gains, wage gains, as well as evidence of the above trend in the unemployment rate in tomorrow’s report.

June’s JOLTS report: slow progress towards a new equilibrium

 

 - by New Deal democrat

Yesterday’s JOLTS report for June captured a labor market that continues to move towards a new equilibrium, mainly via a gradual decline in job openings compared with labor availability. In other words, for the umpteenth time, “deceleration.”

Job openings and actual hires both declined to new 2+ year lows, and voluntary quits also declined to just above a 2+ year low:

For comparison, just before the pandemic, shown at far left, all three metrics were close to or at all time highs. 

Hires on a monthly basis are already back to pre-pandemic levels, and voluntary quits are about 80% back to pre-pandemic levels from their post-pandemic highs. Job openings, which unlike hires and quits, is a “soft” rather than a “hard” metric, because it can be inflated by, e.g., permanent or sham listings, have now retreated by slightly more than 50% to their pre-pandemic levels.

By contrast, layoffs and discharges bucked the trend of softness and declined to a 6 month low (blue):

Their pre-pandemic range was about 1700-1900. Their 1527 level in June was far below that.  Note that layoffs and discharges tend to lead initial jobless claims (red, right scale), which have also declined significantly in the past few weeks. 

Given all the other information we have, the downturn in layoffs looks like a counter-trend move compared with the past year.

For the past 18 months, I’ve likened the job market to a game of reverse musical chairs, where there are more chairs put out by potential employers than there are job applicants willing to fill them. June’s JOLTS report continued the trend we’ve seen for the past 15 months of a jobs market slowly returning towards a convergence of the number of chairs and players. It is likely that Friday’s employment report will show more of the same as well.

Manufacturing and construction give very mixed signals to start Second Half 2023 data

 

 - by New Deal democrat

As usual, the month’s data started out with the ISM manufacturing report for last month, and construction spending for the month before last. Additionally, I am going to take a look at motor vehicle production, because I think it is unusually important right now.

Manufacturing contracted for about the 10th month in a row in July, while the more leading new orders component has now contracted for more than a year. The index did rise 0.4 to 46.4, and new orders subindex rose 1.7 to 47.3:

Any reading below 50 indicates contraction, and ISM itself indicates that a reading of 48.7 in the total index is the breakeven point for the economy. So at face value, this continues to be very negative.

This month I also want to spotlight the price paid subindex, which has been the most negative of all, down as low as 40 near the end of last year. It remains the most negative now at 42.6, up 0.8 for the month:

Here is the question: how much of the continuing steep decline in commodity prices paid by manufacturers has to do with declining demand, and how much due to increasing supply, as pandemic bottlenecks unspool? Stay tuned.

Next, motor vehicle manufacturers used to report customer demand every month. Now they only report quarterly, which is not timely enough to be very interesting to me. But the DoT does report monthly with a one month delay. They reported June’s numbers at the end of last week, showing an increase to 15.7 M cars and light trucks bought on a seasonally adjusted annual basis, while heavy weight truck sales declined to 538,000 annualized:

Needless to say, motor vehicle production is a significant component of manufacturing. This tells us, importantly, that while most manufacturing is declining, per the ISM report, motor vehicle production is still ramping up as supply chain disruptions unspool. This is of a piece with the big increase in rail car deliveries I highlighted yesterday:

Heavy weight vehicle sales in particular are very cyclical, having turned down sharply well in advance of nearly every previous recession in the past 50 years. 

This is important because the ISM index, discussed above, is a diffusion index. It does not weight its various components. This tells us that a very large component, vehicle production, has been a strong counterweight to the decline in other manufacturing industries.

Turning finally to construction, nominally total construction spending rose 0.5% in June, while the more leading residential construction spending rose 0.9%:

But after adjusting for the cost of construction materials, while private residential construction spending did rise, it remains just off its worst post-pandemic levels:

The picture that emerges from this month’s opening data is very mixed. Manufacturing as a whole continues to decline, but against the weight of the very important expanding sector of motor vehicles; while construction continues to increase nominally, but the most leading component has rebounded only slightly in real inflation-adjusted terms.

Dow Theory says transportation and production of goods should move in tandem; what is its message now?

 

 - by New Deal democrat

Partly because mid year data is now being completed, and partly to re-examine my forecasts, I’ve been conducting a top-to-bottom re-check of my metrics.

One thing that seems very important is that, despite no real downturn in business at all, commodity prices have declined -9.6% in the past 12 months, one of the 4 steepest such declines in over 100 years:

The other three all occurred during recessions, two of which were the Great Depression and the Great Recession. In other words, this time the decline in commodity prices may have uniquely been about increasing supply (due to the unspooling of pandemic chokepoints) rather than decreasing demand. If so, that has been a much stronger tailwind for the economy than I have previously believed.

A similar positive is that measured both in terms of real average hourly wages and real aggregate payrolls, average American households have seen an increase in their real income over the past 12 months:

Similarly, this is an economic tailwind driven by decelerating consumer inflation (mainly about gas prices).

On the other hand, when it comes to both the production (blue, right scale) and sales of goods (red) (vs. services), there is little doubt that important sector of the economy has stagnated:

Over the weekend, I spent some time checking to see if measures of transportation of goods supported the data indicating stagnation in the goods sector. Here’s what I found.

The Cass Freight Index measures the YoY% change in the volume of freight moved by trucks. This index peaked in January and has been in decline ever since:

Intermodal rail traffic has been at recessionary level declines, while total carloads are essentially flat YoY:

Confirming a suspicion I have had elsewhere, the breakdown of rail traffic by sector by the AAR indicates that the biggest reason total carloads have not declined is the big increase in motor vehicle and parts loads, up about 12% YoY to date:

The Department of Transportation takes truck, rail, air, and water freight together and combines those into it Freight Transportation Index, which over time generally moves in tandem with industrial production:

It’s absolute level as of May indicates a significant decline since the end of last year:

Interestingly, note that all three of these truck, rail, and freight metrics also declined sharply in 2015, when an industrial recession did not punch through into any decline in consumer spending.

So, finally, here is the comparison of the Freight Transportation Index with real personal consumption for goods:

As in 2006-07 and 2015-16, the downturn in freight transportation has not been matched by any downturn in consumers’ purchases of goods. Almost certainly because of the steep deflation in producer prices and deceleration of consumer prices which, as shown in the second graph at the top, has increased the real spending power of consumers.