Manufacturing and construction show softness to start the month

 

 - by New Deal democrat

As usual, the new month’s data starts out with information on manufacturing and construction.

The ISM manufacturing index has been a good leading indicator in that sector for 75 years. The difference over time, especially the last 20 years, is that manufacturing makes up a smaller share of the total US economy. As a result, even though it has almost consistently been in contraction ever since late 2022, to levels that before 2000 would always have meant recession, that didn’t happen in 2023.

In January, the total index rose to near its equipoise point of 50, and for the first time all year, the more leading new orders index surpassed that level. In February, the two retrenched, as the total index declined to 47.8, and the new orders index declined to 49.2:

Although this indicates softening, on the other hand neither of these is nearly as bad is their low levels last year. In terms of the economy as a whole, count this as a neutral.

After a string of reports indicating strong improvement, both total construction spending and the more leading residential construction spending declined -0.2% in January from their all time nominal highs:

This decline is amplified in real terms by the fact that producer prices for construction materials (red) rose a full 2.0% (note: graph normed to 100 as of December 2022 for better clarity):

This is the first negative construction spending report since last May.

In sum, both leading sectors showed softness in these reports, but not enough to suggest any significant change of trend to a downturn at this point.

January personal income and spending: Goldilocks is knocking at the door

 

 - by New Deal democrat

Personal income and spending has become one of the two most important monthly reports I follow, because it nets out the impacts of higher interest rates and abating inflation due to the unlinking of the supply chain. Because real personal spending on services for the past 50 years has generally risen even during recessions, the more leading components of this report have to do with spending on goods. Additionally, there are several components that form part of the NBER’s “official” toolkit for determining when and whether a recession has begun.

Now, to the report for January . . . 

Nominally income rose a sharp 1.0% in January, the same increase as last January, suggesting that lots of people got big annual raises. Nominal spending rose 0.2%. Prices as measured by the PCE deflator increased 0.3% for the month, meaning that in real terms income rose 0.7% and spending declined -0.1%. Since just before the pandemic real incomes are up 7.0%, and spending is up 10.4% (NOTE: Data in all graphs below except for YoY comparisons, and the personal saving rate, is normed to 100 as of just before the pandemic):

On a YoY basis, the PCE price index is up 2.4%, the lowest since March 2021. For the past 16 months, the YoY measure has been declining at the rate of 0.25%/month, suggesting that it will hit the Fed’s 2.0% target in the next two months:

As I indicated above, for the past 50+ years, real spending on services has generally increased even during recessions. It is real spending on goods which declines. Last month real services spending rose 0.4%, while real goods spending declined -1.1%, reversing December’s revised 0.9% gain:

As per form, real services spending has risen consistently since the pandemic, while goods spending have been somewhat of a mirror image of gas prices, which peaked in June 2022.

Real durable goods spending tends to turn before non-durable goods spending. The former declined -2.1% for the month (vs. +1.5% in December), while the latter declined -0.5% (vs. +0.6% in December):

Durable goods spending had been very much affected over the past several years by the shortage of new vehicle inventory, which has largely abated as 2023 progressed.

Another important metric for the near future of the economy is the personal savings rate. In January it increased 0.1% to 3.8%:

On the positive side, the declining trend in this rate since last May indicates a lot of consumer confidence. But on the negative side it remains close to the all time low readings of 2005-07, indicating vulnerability to an adverse shock. One of my forecasting models uses such a shock as a recession warning indicator. In any event, there is no such shock indicated at the moment.

Also as indicated above, the NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) continued to increase, up 0.3% for the month, to yet another new record high:

This has been something of a mirror image of gas prices, rising consistently since June 2022.

Finally, the deflator in this morning’s report is used to calculate real manufacturing and trade sales, another metric relied upon by the NBER. This increased a strong 1.0%,also to another new record high:

In summary, with the exception of real spending on goods - which really just took back December’s big increases - this was an excellent report.  Inflation is now very close to the Fed’s preferred baseline rate, and both incomes and spending are up substantially. As I wrote last month, you would be well within your rights to call this a “Goldilocks” economy.

Initial claims still very positive, especially YoY

 

 - by New Deal democrat

Before I get to this morning’s personal income and spending report, let’s get the latest weekly update to jobless claims out of the way.

New jobless claims rose 13,000 to 215,000, while the four week moving average declined -3,000 to 212,500. Continuing claims, contrarily, rose 45,000 to 1.905 million, their second highest reading in over 2 years (but remains extremely low compared with the 40 years before the pandemic):

On the more important YoY basis for forecasting purposes, both the one week and four week average of new claims are down -2.7%, while continuing claims are up 10.9%, which remains better than almost all readings in the past 10 months:

Finally, for purposes of forecasting the unemployment rate, the February average of claims continues to suggest that the unemployment rate will remain steady or decline in the next few months:

The Sahm rule for recessions is not going to be triggered in the nearest future.

The state of freight

 

 - by New Deal democrat

There’s no significant economic news today. Yesterday we did get durable goods orders, which are an official leading indicator. I don’t pay too much attention to them, because they are so volatile. Thus yesterday’s big -6.1% decline (blue in the graph below) is more likely than not just noise, particularly because “core” capital goods orders (red) increased 0.1%, and have been generally tending sideways. Another segment which is also an official leading indicator, consumer durable goods orders (gold), have been trending higher for the past six months:

Another important - and less noisy - way to look at the manufacturing and consumption aspects of the economy is to compare transportation with real sales. Note that comparing *production,* which seems logical, won’t work because so many products are imported and so are not caught in domestic production data. But they are caught in sales. The theory goes back to Charles Dow (he of the Dow Jones averages) who pointed out that every product that is produced, must be shipped to market before it is sold. Thus if there is a disconnect between production and transportation, something is amiss, and probably not to the upside.

To cut to the chase, here’s the comparison of real total sales and transportation going back to the start of the Millennium (which is when the freight index data starts):

You can see that they closely track one another, with a few exceptions that have gotten resolved within 12-24 months. Notably, before the 2001 and 2008 recessions, freight turned down significantly first.

Here is the close-up on the last several years:

We had a significant downturn in transportation early last year, but the trend has appeared to reverse higher in the past six months.

Another aspect of transportation, which has a solid historical leading quality is sales of heavy weight trucks. Here’s what they look like YoY (red) compared with passenger vehicles and light weight trucks (blue):

Not every downturn presages a recession, but every recession has been preceded by a downturn. And heavy weight truck sales always turn down before light vehicle sales.

Here’s the close-up of that for the past several years:

We have had a relatively minor downturn YoY during the autumn, but as of December that *may* have been resolving. We’ll find out in the next week when the January data is released.

Finally, trucks need to be driven (duh!). So employment in the trucking industry has also been a leading indicator. There, the news is definitely not good:

The big downturn in summer 2023 was the bankruptcy and closure of a major trucking company, with the resulting unemployment of its former employees. Some of that has been recovered since, but not that much, suggesting that the bankruptcy was signal, not noise. 

As indicated above, motor vehicle sales will be updated within the next week. Trucking employment will be a week from Friday as part of the February employment report.

Repeat sales house price indexes continue to increases on par with past expansions

 

 - by New Deal democrat

House prices lag home sales, which in turn lag mortgage rates. Yesterday we got the final January reading on sales. This morning we got the final monthly (for December) read on prices, for repeat sales of existing homes.

The FHFA purchase only price index rose 0.1% on a seasonally adjusted basis, and is up 6.6% YoY. Meanwhile the Case Shiller National index rose 0.2% for the month, and was is up 5.1% YoY. Here’s what the monthly numbers look like for the past five years:

Note that this month’s increase was the lowest since last January for both indexes.

Further, although the 6.6% and 5.1% YoY increases appear to be major, the long term graph of both of them below, compared with the CPI for shelter (red, *2.5 for scale) shows that this is actually similar to gains during the majority of the past 25 years outside of recessions:

For the month, the YoY increase in the FHFA index declined -0.1% from 6.7% in November, while the YoY increase in the Case Shiller index rose 0.5% from November’s 5.1%. As shown in the first graph above, this is because we had a period of actual declines in prices late in 2022. If present trends continue, these YoY comparisons will drop out in two months, and the YoY deceleration will continue.

It is likely that chronic under-building of houses in the decade after the Great Recession has much to do with such price increases outstripping worker pay.

Additionally, because house prices lead “Owners’ Equivalent Rent” in the CPI, the above graph shows that we can expect further declines toward the more normal 2.5%-3.0% YoY range over the coming months in that very important inflation metric. 

New home sales and YoY prices change little; expect sideways trend to follow similar recent trend in mortgage rates

 

 - by New Deal democrat

This week we conclude January’s housing market data with repeat sales prices tomorrow, and new single family home sales, which were reported this morning.

Per my usual caveat, while new home sales is that they are the most leading of the housing metrics, they are noisy and heavily revised. Which was the case this month, as last month’s number was revised downward by about 2%, or 13,000. January sales increased 10,000 from that revised number (blue in the graph below) to 661,000 annualized. The slightly less leading but much less noisy single family permits is also shown (red, right scale):

The likelihood is that single family permits will stall out at current levels and quite likely even decline in coming months, following the recent downward trend in sales.

Now let’s compare sales with the even more leading metric of mortgage rates. Both are shown YoY (rates inverted, and *25 for scale):

We are unlikely to see much more YoY improvement in new home sales. Since one year ago they stood at 649,000, this suggests their current absolute level is about where they are likely to remain in the next few months.

Finally, here’s the YoY update on median prices, which are not seasonally adjusted (red), which lag sales (blue):

We will probably continue to see negative YoY comparisons in prices for some months to come before the situation abates.

Generally speaking I am not expecting much in the way of big moves in new home sales or prices until there is a significant change in mortgage rates.