Repeast sales ouse prices show signs of re-acceleration in the last data of 2024

 

 - by New Deal democrat

I was on vacation through the weekend, and since there has been no significant economic data in the post-Christmas lull, I decided to continue to play hooky. After tomorrow, on Thursday the 2025 data will start in earnest, so expect a return to form later this week.

In the meantime, this morning’s repeat house price indexes from the FHFA and Case Shiller show a somewhat worrying re-acceleration in house price appreciation. Specifically, on a seasonally adjusted basis, in the three month average through October, U.S. house prices according to the Case-Shiller national index (light blue in the graphs below) rose 0.3%, and the somewhat more leading FHFA purchase only index (dark blue) rose 0.4% [Note: FRED hasn’t updated the FHFA data yet]:

On a YoY basis, the Case Shiller index decelerated to a 3.6% gain, while the FHFA index accelerated slightly to a 4.5% YoY increase:

Finally, because house prices lead the measure of shelter inflation in the CPI, specifically Owners Equivalent Rent by 12-18 months, we can use this morning’s data to calculate its trend which is 25% of the entire CPI. Despite the increase in the YoY reading in the FHFA in the past several months, this indicates that OER should continue to trend towards 3-3.5% YoY increases in the months ahead:

The deceleration in OER has been very slow, but has finally fallen below 5.0% YoY. The most leading rental indexes, including the Fed’s experimental all new rental index, indicate that YoY rent increases should decline further, which adds to the evidence for continued deceleration in that huge component of consumer price inflation.

Additionally, because prices generally follow sales, and existing home sales have been stagnant for almost 2 years, while new home sales have only increased slightly:

this also suggests that there is very little in the way of increased price pressure in the housing market going forward into 2025. Indeed, although I won’t bother with the graph, the median sales price for new houses has continued to *decrease* in the past year.

Initial jobless claims continue neutral trend, while continuing claims make a 3 year high

 

 - by New Deal democrat

This Christmas week initial claims declined -1,000 to 219,000. The four week average rose 1,000 to 226,500. With the typical one week delay, continuing claims 46,000 to 1.910 million, the highest number in over 3 years:

On the YoY% basis more important for forecasting purposes, initial claims were up 2.8%, and the four week average was up 7.7%  Continuing claims were up 5.1%:

Because of seasonality issues at this time of year, the four week average is much more important. The numbers over the past few months tell us that while there is no recession in the immediate future, there is some definite weakness creeping into the economy, and in particular the jobs aspect.

Finally, since the trend in initial claims in particular leads the unemployment rate by a number of months, here is what the YoY% change in each looks like:

Over the past few months, the trend in claims has been between 5%-10% higher. Since one year ago the unemployment rate was 3.7%, this suggests the unemployment rate should trend towards 3.9%-4.1% in the next several months (note we are calculating % changes in a % number). Since in thee past few months the unemployment rate has been 4.1%-4.3%, this suggests a rate that is unchanged or slightly lower month over month. Recall also that very high immigration may have distorted the unemployment rate higher this year compared with its normal trend.

This further suggests that the Sahm rule, which was triggered for several months earlier this autumn, will remain back down below its threshold, currently at th 4.2% unemployment rate level averaged over 3 months.

Merry Christmas and Happy Hanukkah to all who celebrate!

 

 - by New Deal democrat

Last night we celebrated with the traditional Christmas Eve pastime of viewing “Die Hard.”

Regular economic blogging will resume tomorrow with the release of weekly jobless claims.

Sales of new and existing homes increased in November; declining price trend continues for the former, but pressures increase in the latter

 

 - by New Deal democrat

Ive been looking at new and existing home sales more in tandem recently, as we are looking for a rebalancing of the market, with prices abating in existing home sales and inventory increasing, vs. new houses where prices have been slightly declining.

Additionally, as usual let me start with the important caveat that new home sales data are very noisy and heavily revised. And heavily revised they were, as October’s preliminary report of 610,000 annualized, which was the lowest rate since November of 2022, was revised higher by 17,000 to 627,000; and November rose another 37,000 from there to 664,000 annualized, still on the low side for the past two years:

The above graph shows single family permits as well, which tend to lag new home sales by a few months, but are much less noisy. New home sales are suggesting that permits will likely stagnate near current levels in the next few months.

The relatively low number of new home sales probably has much to do with the increase in mortgage rates close to 7%:

Inventory of new houses continued to increase to a 15+ year high. This is actually “good” news for the moment because as the below long term historical graph shows, recessions have in the past happened after not just sales decline, but the inventory of new homes for sale also decline:

Meanwhile the trend in prices continues to be slightly downward:

On a YoY basis, the median price of a new home is now -6.3% lower than it was one year ago.

Turning to xxisting home sales, they have been flat in the range of 3.85 -4.10 million annualized for almost two years. After breaking to the downside two months ago at a 10+ year record low of 3.83 million, November’s report increased to an eight month high at 4.15 million units annualized:

But the moderation in the YoY% change in prices from the past few months reversed somewhat as the median price for an existing home increased 4.7% YoY (below graph shows non-seasonally adjusted data):

On a YoY basis, in response to the longer term decline in inventory, existing home prices have risen consistently since 2014, and accelerated during the COVID shutdowns. After briefly turning negative YoY in early 2023, troughing at -3.0% in May, comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of this year. 

Here are the YoY% comparisons since then:

June. 4.1% 

July.  4.2% 

August. 3.1%

September  2.9% 

October 4.0%

November 4.7%

Finally, while inventory declined seasonally in November, it is the highest inventory for that month since 2019:

Putting the picture of new and existing home sales together, mortgage rates are putting a lid on sales of either (graph shows YoY new home sales and change in mortgage rates, the latter inverted so that lower rates show to the upside):

Prices of new homes have continued to follow sales:

And as shown above inventory in both new and existing homes have continued to increase. The big inventory of new house is presumably helping keep a lid on prices, while  the inventory of existing houses, which also continues to increase, is still doing so too slowly to reverse price pressures. New houses continue to be the relative bargains. And both continue to be pressured by near 7% mortgage rates.

Weekly Indicators for December 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

The yield curve is now almost entirely un-inverted, but in part because longer term interest rates have risen (not such a good thing).

Meanwhile a variety of short leading indicators stepped on rakes this week, which may be noise, or may be of a piece of other weakening indicators we have seen lately.

In any event, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little change for the vending machines.

Personal income and spending continue their positive trend in November, but looking late cycle-ish

 

 - by New Deal democrat

Adjusted for inflation, both personal income and spending came in positive once again in November. But under the hood, the report looked a little tepid, and while it certainly wasn’t recessionary, the data was consistent with what I would expect later in the cycle of an expansion.

For the record, real income rose 0.2% for the month, and real spending increased 0.3%, continuing their consistent trend since mid-year 2022:

Real income less government transfers, one of the metrics that the NBER looks at to determine economic expansions vs. recessions, also increased, by 0.1%, in November, continuing its uptrend as well:

Last month the headlines were mainly about inflation. I demurred. And that was burne out by the mild 0.1% increase in prices this month, average for the past year:

Indeed, in the seven months since April prices have only risen a total of 0.9%, for a 1.6% annual rate, below the Fed’s target. 

On a YoY basis, prices increased 2.4%, up from 2.1% in September (blue in the graph below). This was all about services (gold), which are up 3.8% YoY, their approximate YoY advance for the past six months. On a YoY basis, goods (red) are still in mild *deflation*:

On a monthly basis, the deflation in goods prices appears to be ending. Prices rose very slightly (less than 0.1%) in November:

The YoY comparison is elevated all because of services, as this long term graph shows:

In contrast with the CPI, only about 0.3% of that YoY rate is housing.

If goods deflation is no longer a tailwind, and services inflation remains elevated, that is a typical late cycle configuration.

Also looking late cycle-ish was the personal saving rate at 4.4%, down from 5.5% last January.  As the below longer term historical graph which subtracts the current rate to show it at the zero line shows, the current saving rate is equivalent to that late in the last two expansions (not counting the pandemic):

Basically, as an expansion goes along, consumers get further out over their skis, and so more vulnerable to an adverse shock.

Finally, the PCE price index is used to calculate real manufacturing and trade sales (with a one month lag), another metric used by the NBER to determine if the economy is in recession or not. This declined -0.1% in October, but as the pot-pandemic graph below shows, its uptrend remains intact:

So the good news is that this very important report on the health of the consumer remained positive in November, consistent with its trend since June 2022. There wasn’t any bad news. But the continued elevation in the services price index and the low level of savings suggest that we are later in this expansion cycle. 

Jobless claims: with a dash of seasonality salt, trending towards weakness

 

 - by New Deal democrat

As expected, jobless claims declined from one week ago, as the delayed Thanksgiving week seasonality moved out of the numbers.

Initial claims declined -22,000 to 220,000, while the four week moving average increased 1,250 to 225,500. With the typical one week delay, continuing claims declined -5,000 to 1.870 million:

On the more important YoY basis, initial claims were higher by 6.3%, and the four week average higher by 7.3%. Continuing claims were also higher, by 3.9%:

Because the initial claims numbers include the weeks before, of, and after Thanksgiving, the seasonality effects should be a wash; which means that while they are not recessionary, they do imply some real weakness.

Finally, here is the look at initial and continuing claims averaged over the entire month, compared with the unemployment rate. Note all of these are rendered as YoY% changes:

One year ago the unemployment rate was 3.7%. The latest claims comparisons suggest that (absent the effects of mass immigration in the past several years) the rate should be trending higher by about 5%-10% over that level. Since this is a percent of a percent, that means trending towards 3.9%-4.1%, which is a lower range than the rate has been in the past five months. 

More importantly, with one exception weekly jobless claims have come in higher YoY every week since the beginning of September. I’m continuing to take these numbers with an extra dash of seasonality salt, but at this point claims are joining the list of indicators - ever so slightly - suggesting weakening of the economy ahead.

The housing sector now hoists a red flag recession warning

 

 - by New Deal democrat

The very important construction data from the long leading housing sector was mixed this morning for November.

The most leading datapoint, permits, increased 86,000 on an annualized basis to 1.505 million. Even more importantly, single family permits, which have the least noise and most signal of any of the datapoints, continued their rebound from their recent June low, increasing 1,000 to 972,000, their highest level since April. Measnwhile starts, which are noisier and tend to lag permits by one or two months, declined another -23,000 to 1.289 million, their second lowest reading since 2020:

Starts did rebound in the hurricane-stricken South, but that was counterbalanced by a steep decline in the Midwest. Again, this series has a lot of noise, so I am not terribly concerned about a one month pothole.

But if housing permits suggested a near term increase in construction, units presently under construction continued to plummet, down -27,000 to 1.434 million, -16.2% down from their peak, and the lowest number since August 2021:



This is very important, because in the past it has declined on average -15.1% and by a median of 13.4% before the onset of recessions:

Three months ago I hoisted a yellow flag “recession watch” for housing construction. I held off hoisting a red flag last month because of the hurricane effects in the South. With that dissipated, I am hoisting the red flag now: housing is forecasting recession.

Nevertheless, as I cautioned last month, in our present situation it appears permits have bottomed. Because starts, following permits, should start trending back upward in the next several months, and housing units under construction follow starts:

I still think housing units under construction will not decline too much further before bottoming as well. 

Additionally, employment in residential construction, which typically follows units under construction with a lag, has continued to increase so far:

Residential construction employment should decline before any recession were to occur.

Finally, recall that mortgage rates (change YoY, inverted) lead all of this data, including both measures of permits:

So the issue becomes whether mortgage rates continue to head back higher - in which case recession risks increase - or are at the top of their range going forward.

While the housing sector is now forecasting recession, focusing on it alone is not enogh. Focusing on manufacturing or residential construction employment alone is not enough. As I wrote last month, it is only when there is a more broad-based downturn across multiple goods-producing sectors that a recession typically occurs. Employment in goods producing jobs did decline slightly from two months ago, but it is not significant at this point. As I pointed out on Monday, corporate profits also stalled in Q3, but have not turned down; and if they did peak it would not forecast recession until later next year. Additionally, as we saw yesterday consumption is still going strong.

So while the housing sector is forecasting recession in the near future, it has not been joined by other critical components yet.

Industrial production continues to slide

 

 - by New Deal democrat

Industrial production declined for the third month in a row in November, down -0.1%, while October was revised downward another -0.2%. Manufacturing production on the other hand increased 0.2% in November, but September and October were revised downward a combined -0.3%, so on net this was another -0.1% decline. They are now down respectively -1.5% and -2.0% from their late 2022 highs:

Before 2001 and especially before the Great Recession, any YoY decline *always* coincided with or at least immediately heralded a recession. But since the accession of China to regular trading status in 1999, downturns of even -5% or more, as in 2015-16 and 2018-19 have not necessarily meant recession.

And as this close-up of the post pandemic record show, on a YoY basis production is only down about -0.9%:

The economy continues to be powered forward by consumption of services, and also by construction spending. Increasingly that does not include residential construction, which as I have written a number of times recently is down from its most recent peak to a level which typically in the past has meant recession. We’ll find out more about that tomorrow.

Real retail sales on the cusp of breaking out of their multi-year doldrums

 

 - by New Deal democrat

Consumption leads employment, and as I reiterated yesterday real per capita retail sales has a history as a long leading indicator.

Which means that retail sales for November, which rose 0.7% nominally, continues its recent strong string of positives, increasingly looking like it is finally breaking out of its 2 year plus doldrums.

Since consumer prices rose 0.3% in November, real retail sales were up 0.4% for the month. While real retail sales are still -1.9% below their all time peak right after the 2021 stimulus package, with today’s report they are the highest since May 2022 except for one month:

On a YoY basis, they are also higher by 1.0%:

This is another positive since recessions typically occur with sales negative YoY. Here’s what the past 30 years before the pandemic look like, subtracting 1% from the YoY measure so that it shows at the zero line:

It’s a weak result, but for a change a non-recessionary one.

Finally, real retail sales are a good short leading indicator for the trend in jobs growth. Yesterday I speculated that real retail sales per capita might be distorted in the past several years by the outsized importance to CPI of the sharp increase in the shelter component. So in the graph below I also include real sales ex-shelter (light blue):

Either way, real retail sales are forecasting continued deceleration - which at this point translates into increased weakness - in hiring in the months ahead. Because, as I have pointed out in several posts in the past few weeks, YoY jobs gains are likely to be revised significantly downward for late 2023 and 2024 when we get the annual benchmark revisions in a couple of months, we may be closer to the trend line forecast by real retail sales already.

Updating the nonfinancial long leading indicators

 

 - by New Deal democrat

I haven’t “officially” updated my take on the long leading indicators - those that forecast a recession at least one year beforehand - in almost two years. That’s because the hurricane force tailwind of the supply-side deflationary unlinking of the global supply chain completely swamped everything else. So if I were to examine, e.g., corporate bond prices, is the appropriate comparison with 2021, or with 2023, after the supply chain had unlinked? Since there’s no clear answer to that, I haven’t seen the point.

But the same isn’t really true of the non-financial indicators. These detail producer and consumer well-being out in the real world. If their fortunes are waxing, the economy should continue doing well; if they are waning, there’s likely trouble ahead.

So I thought now might be a good time to look at those. Below I’ll look at five such long leading indicators. Two have to do with the housing market, two with corporate health, and one with consumer spending. (The three financial indicators I’ve eliminated are the yield curve, corporate bond prices, and money supply, all of which are more or less under the control of the Fed, and are strictly financial).

Let’s start with housing. Housing permits have long been known as a long leading indicator. Below I show total (blue) and single family (red) housing permits:

With the sole exception of the 2001 recession, which was focused on producers, housing permits have declined over 10% - and usually over 20% before the onset of recessions, with the peak occurring over one year before. In our present situation, both total and single family permits are down almost -25% since their peaks in January 2022. As I’ve written several times in the past couple of months, this is recessionary, although in a recession I would expect them to decline even further. We’ll get the next update of these numbers on Wednesday.

A similar tale is told by private residential fixed investment as a share of GDP. Calculated both in real and nominal terms, this metric also turned down typically between one and two years before a recession. In real terms the ratio peaked in 2021; in nominal terms in 2022:

So, both of our housing metrics are telling us to beware of recession.

Now let’s turn to the producer sector. Corporate profits deflated by unit labor costs also typically turn down a year or more before a recession. This makes sense, because once profits turn down, executives start looking for ways to cut costs, and frequently that means cutting staff.

With the exception of 1974, this metric has always declined at least one year before the onset of a recession. It did decline from the last quarter of 2021 to the last quarter of 2022, but has risen since then to an all time high in Q2 of this year, before declining a tiny -0.2% in Q3:

If this is generally positive, the picture of corporate borrowing is more mixed.

Corporate demand for loans has been declining for several years. The nadir of its decline was in 2022. While still negative, it had generally been improving since then - a typical marker of an economy coming *out* of a recession - until this past quarter:

We won’t know for several more months whether or not this is the beginning of a new slide.

The closest I’ll get to a financial indicator in this series is the percentage of banks tightening vs. loosening standards for corporate loans. Banks have progressively been making conditions less tight for the past year. Again, this is something we typically see coming out of recessions:

If corporate profits recover from their slight decline in Q3, then this is all just a blip, and producer health is very positive. If they don’t, then I’d want to see if loan demand continues to slide.

Finally, let’s look at the consumer side. In the modern era, real per capita retail sales have generally turned down at least one year before a recession. This is typically the sale of goods more than services. If consumers are pulling in their horns buying actual stuff, then producers react - with a lag - by cutting production and/or staff.

Here the news has been relentlessly negative since 2021, and in the past two years in all but three months real sales have actually been lower YoY:

This has looked very recessionary for several years.

But because similar measures, like real personal consumption expenditures for goods have been very positive, it made me wonder if the difference was all about the deflator, because shelter costs are 1/3rd of the entire CPI measure, but are a much smaller share of the personal spending deflator. So this next graph deflates retail sales by CPI less shelter, and there the story is quite different:

Basically, take out rent and the fictitious owners’ equivalent rent, and real sales per capita have been increasing off and on for over two years. Shelter costs are squeezing consumers, but they’re spending their money on other stuff just fine.

The conclusion I come to looking at the above nonfinancial long leading indicators is that the economy, excluding the housing sector, is not poised to enter a recession in the next few quarters. What happens with the housing sector will depend very much on mortgage interest rates. The next crucial measure to watch is whether corporate profits resume growth, or whether Q2 of this year was their high water mark for the cycle. Even in the most negative case, that would suggest no recession until at least the latter part of next year at the earliest.

Weekly Indicators for December 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

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

While the short term forecast and nowcast have remained relatively constant, the “action” has been in the long leading indicators - some things good, some bad.

The biggest thing that happened this week is that the 10 year minus 3 month Treasury yield spread re-normalized, joining the 10 year minus 2 year spread.

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 my efforts in organizing the information for you.

Good news on real aggregate payrolls, but an additional yellow flag on jobs

 

 - by New Deal democrat

With the update on inflation earlier this week, let’s take a look a real average wages and real aggregate payrolls. Plus there is a significant update to my yellow flag caution on the employment situation.

First, nominally nonsupervisory wages rose slightly under 0.3% in November, while consumer prices rose slightly more than 0.3%. Thus real average hourly wages declined slightly, but rounded to unchanged:

Real hourly wages remain at their all-time record high excluding the two months of pandemic lockdowns, where the result was heavily skewed by the layoffs of low income workers.

Aggregate nonsupervisory payrolls rose slightly under 0.4%, so after inflation real aggregate payrolls rounded to up 0.1%:

This is yet another all time record high. I pay a lot of attention to this metric, because it has almost always turned down at least several months in advance of any recession. 

That’s the good news. Now the bad news.

On Monday I wrote that the Establishment jobs Survey started flashing some yellow caution signals, partly in the downturn in manufacturing jobs, and its spread to a slight downturn in goods producing jobs sector. Beyond that, the YoY% gain for jobs as a whole was a little under 1.5%. I pointed out that in the past a gain that low has typically presaged a recession. I further wrote that the latest preliminary release for Q2 of this year of the comprehensive QCEW, a nearly full census of all employment, showed a gain of only 0.8% for the entire 12 month period, vs. a gain of 1.6% for the official nonfarm payrolls report.

One drawback of the QCEW is that it is not seasonally adjusted. But the Philadelphia Fed has a series called the Early Benchmark, which does undertake a seasonal adjustment based on some 75% of the entire employment universe.

This was released yesterday, and the news was not good. According to the Phildelphia Fed, there was an actual decline of -0.1% in Q2 of this year, vs. a gain of 0.3% in the official monthly reports, mainly due to a downturn in the month of June:

An important word of caution: a similar episode happened in 2022, which gave rise to a number of recession forecasts. And then when the preliminary QCEW was finalized, the decline was completely revised away. We won’t get that for 2024 for several more months, so as usual take this with a grain of salt. But it does add to the yellow flags.

Jobless claims: seasonality strikes again

 

 - by New Deal democrat

As is so often the case this time of year, seasonality likely played havoc with this week’s new jobless claims. Last year Thanksgiving was November 23rd; this year it was the 28th, putting it in a different week for many statistics.

So the jobless claims this morning were for the first full week after Thanksgiving, whereas last year the equivalent week was one week before. And on a non-seasonally adjusted basis, claims jumped from 211,000 last week to 310,000 this week, as we moved from a 3 day workweek back to a 5 day workweek.

With that massive helping of salt, here are the seasonally adjusted numbers. 

Initial claims rose 17,000 to 242,000, a seven week high. The four week moving average rose 5,750 to 224,250, still below average for the past two months. With the typical one week delay, continuing claims rose 15,000 to 1.886 million, right in the middle of their range for the past two months:

On the YoY basis more important for forecasting purposes, initial claims were up 18.0%, while the four week moving average was only up 5.9%. Continuing claims were up 3.7%:

This is a case where the four week average is giving a much truer reading. In fact, I think it is best to average several of the past weeks even in that metric together. And I doubt the seasonality will completely abate next week either.

Also, because this is the first full week of the month, I’ll dispense with any look at what this might mean for the unemployment rate in the next monthly jobs report.

The takeaway here is to beware any one week’s number in this season of seasonality. Both the four week average and continuing claims say that the situation is a little weaker than one year ago, but nowhere near being negative. Score this week as another neutral reading.