Weekly Indicators for March 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

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

With interest rates having come down from their highs of five months ago, I anticipated that the shorter leading indicators might follow suit and improve. This week, there was some more evidence that they have.

As usual, clicking over and reading should bring you up to the virtual moment as to the important indicators for the economy, and will reward me with a little pocket change.

Signs of a thaw in the frozen existing homes market, but a very long way to go

 

 - by New Deal democrat

There’s no big economic news today, but yesterday existing home sales were released. While they have historically constituted up to 90% of the entire market, they have much less economic impact than new home sales, which involve all sorts of construction activity, followed by landscaping, furnishings, and other sales.

Since the Fed started raising rates two years ago, the two markets have gone in entirely different directions, since existing homeowners are largely trapped by new or refinanced mortgages in the 3% range, while builders of new homes can make all sorts of accommodations to entice buyers even with mortgage rates near 7%.

As a result, the existing home market for all intents and purposes froze. Yesterday’s report on existing home sales showed that there is a little thawing going on - but hold the pom poms for now.

The seasonally adjusted annual pace of existing home sales rose 38,000 to 438,000 in February, vs, 4,530,000 one year ago. But as the comparison with non-seasonally adjusted data shows, February is typically one of the slowest sales months of the year. Thus a relatively small change - caused by, say, unusually accommodating winter weather - can make a big difference in the seasonally adjusted rate:

When we step back and look at the data for the past 5 years, we can see that there was a similar jump in February of last year as well, that made for the highest seasonally adjusted total for the entire year:

As usual, take one month’s seasonally adjusted data, especially during winter months, with an extra grain of salt.

That being said, there are signs of some improvement in the market, as both total active listings (blue) and new listings (red) housing inventory has been higher YoY for the past four months:

For new listings, this is the first sustained uptick in three years.

But if this is a thaw, it is only the beginning of the thaw, as we can see when we look at the absolute levels rather than the YoY changes (note separate scales):

The first thing to point out is that this data is not seasonally adjusted. Typically listings bottom in December or January, and improve until mid year. So we need to compare this February with February in previous years.

Before the pandemic, total active listings in February averaged just over 1 million units. New listings averaged about 425,000 for the month. After the pandemic struck, both really plunged, with active listings in February bottoming at 347,000 in 2022, while new listings in February bottomed at 305,000 last year. In February this year, active listings totaled 665,000 and new listings totaled 339,000.

In other words, while there are definitely signs of improvement, the existing home market has a long ways - as in, about 400,000 more monthly active listings and 100,000 new monthly listings - to go.

The positive streak of news from initial and continuing jobless claims continues

 

 - by New Deal democrat

Initial and continuing claims once again continued their recent good streak. 

Initial claims declined -2,000 to 210,000, while the four week moving average rose 2,500 to 211,250. Continuing claims, with the typical one week delay, increased 4,000 to 1.807 million:

While these aren’t the 50+ year lows we saw 18 months ago, they’re not far off.

For forecasting purposes, the YoY% change for initial claims is -15.0%, while the four week average is down -10.4%. Continuing claims are now only up 0.2%:

Needless to say, these strongly indicate no recession in the next few months.

Because jobless claims can be used to forecast the “Sahm rule” for recessions, let’s update that as well.

With last month’s 2 year high in the unemployment rate, last week I write that U wondered whether, because unemployment includes both new and existing job losses, it followed continuing claims more than initial claims (although initial claims lead both). The historical graph, which I won’t repost this week, indicated that continuing claims also lead the unemployment rate, although with much less of a lead time.

Here is this week’s update of the post-pandemic record for the past two years on a monthly YoY% basis (unemployment rate YoY shown in red):

Since both initial and continuing claims YoY are virtually unchanged, or even lower, I expect the unemployment rate to recede to at least unchanged YoY in the next several months. This would take it back down to the 3.7% or 3.6% area.

Here’s the same comparison on an absolute rather than YoY basis:

This also suggests a lowering at least back down to 3.8%.

The bottom line: no triggering of the Sahm rule.

“Are you better off than you were four years ago?”

 

 - by New Deal democrat

No economic news today, so let me take a look at the supposed killer recent GOP meme that they claim is completely unanswerable: “Are you better off today than you were four years ago?”

This is based primarily on consumer sentiment reading as well as polling that has consistently shown that most people think that the economy is poor, even though they rate their own situation as doing well. Dan Guild has a model comparing consumer sentiment with Presidential approval ratings. He concludes that Biden will lose re-election unless consumer sentiment as measured by the University of Michigan does not improve to the index level of 82.

As I’ve pointed out in the past, Presidential approval correlates quite well with the price of gas. Here’s the historical record updated through last month:

Except for those periods late in recessions and shortly thereafter, when the price of gas has typically declined sharply but the unemployment rate is very high, generally speaking, the lower the cost of gas, the higher the consumer sentiment. Interestingly, except for the early part of the 1990s, when gas prices were ridiculously low, the correlation holds better nominally than adjusted for income.

But perceptions aside, are most people in fact worse off than 4 years ago? Here are two ways of looking at that.

First, as I noted several months ago, Motio Research has produced very good monthly estimates of median household income, that track very well with the (unfortunately) annual measure, which is only reported in September of the next year (thus, for example, the most recent official report even now is for the year 2022). Here’s their update through February:

Note that they recommend (in the small print at the bottom) ignoring the results from March through October 2020, when response rates were very skewed. Leaving those out, only three months during Trump’s term were better than the current reading, and two of those, at 112.7, were equaled by January’s reading. Only February 2020 scored higher, at 112.9.

A second way of measuring is to compare real average and aggregate wages. Below I show average hourly wages (blue), average weekly wages (red), and aggregate payrolls divided by population (black), all deflated by the CPI, and normed to 100 as of February 2020:

Most of the surge in average hourly and weekly earnings in 2020 and early 2021 were compositional. That is, most of the workers laid off during the worst of the pandemic were low wage service workers, in places like restaurants, bars, and entertainment venues. When those workers were rehired during 2021 and 2022, the averages went down, with a very big assist from gas prices spiking to $5/gallon. Since then, both measures have exceeded their levels from just before the pandemic.

Aggregate payrolls, even divided by population, and so including everyone who is not working, and not even in the labor force, hit their pre-pandemic level late in 2021 and haven’t looked back. They are *not* affected by compositional issues. And they are currently 2.9% higher, even on this per capita basis, than they were just before the pandemic.

So the truthful answer for most people to “Are you better off than you were four years ago?” is by any reasonable measure, “Yes.”

Housing construction rebounds in February, as permits and starts are stable and rebounding

 

 - by New Deal democrat

Yesterday I wrote of how Fed rate hikes had not translated into a decline in the amount of housing under construction, and without that I did not see how a recession could occur. And in reaction to January’s housing construction report I concluded, “To signify a likely recession, units under construction would have to decline at least -10%, and needless to say, we’re not there. With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize.”

This morning’s report for February confirmed that sentiment, as single family permits, total permits, and housing starts lol rose, with starts making up almost all of their steep, and noisy, decline in January:

Single family permits, which are the most leading and least noisy of the above metrics, made a new 18 month high at 1.031 million annualized, which is 37% higher than their low of 748,000 annualized last January. They have made up about 60% of the ground they lost since the start of the Fed’s rate hikes over 2 years ago. Starts, which lag slightly and are much more noisy, have likely bottomed as well.

To reiterate: housing units under construction (red in the graph below) are the best measure of the actual economic activity in the housing market, and while these declined -8,000 for the month to a new nearly 2 year low, they are only down -2.6% from their peak. Single family units have actually increased 17,000 from their bottom last October, while multi-family units have declined -3.5% from their all-time 50+ year high last July:

The reason I have broken out single vs. multi-family construction is because, in response to record high house prices, builders turned to higher density, lower cost apartment and condo construction. Hence the record high last year in that metric.

Unsurprisingly, permits (blue in the graph below) lead housing units under construction (red), but a major disconnect has opened over the past 10 years, as especially large multi-unit developments take longer to complete:

I do expect a further gradual decline in total housing units under construction in the months ahead, to catch up with the decline in permits that bottomed one year ago. But I doubt we will cross the -10% threshold that it would normally take to signal a recession.

A large part of that is because mortgage rates have stabilized (red in the graph below), and since permits and starts follow mortgage rates, they have generally stabilized as well:

The best way to view this relationship is YoY, which is shown below:

Mortgage rates are slightly higher than they were 12 months ago. After a brief decline last spring, mortgage rates rose to multi-year highs last autumn. So unless there is a renewed major move upward in mortgage rates, I expect the YoY comparison by permits to turn positive by this summer sometime. That is going to translate into gains in permits and starts, and a likely bottom in housing units under construciton. 

As to prices, they generally follow housing sales. Because of the bifurcation in the housing market, with many existing homeowners frozen in place by their 3% existing mortgages, new home sales have rebounded, and new home prices are in a bottoming process. We’ll get more information later this week and next week when new and existing home sales are reported.

Manufacturing and construction vs. the still-inverted yield curve

 

 - by New Deal democrat

Prof. Menzie Chinn at Econbrowser makes the point that the yield curve is still inverted, and has not yet eclipsed the longest previous time between onset of such an inversion and a recession. So he believes the threat of recession is still on the table.

And he’s correct about the yield curve, although it is getting very long in the tooth. In the past half century, the shortest time between a 10 minus 2 year inversion (blue in the graph below) to recession has been 10 months (1980) and the longest 22 months (2007). For the 10 year minus 3 month inversion (red), the shortest time has been 8 months (1980 and 2001) and the longest has been 17 months (2007):

At present the former yield curve has been inverted for 20.5 months, and the latter for 16.5 months. So if there is no recession by May 1, we’re in uncharted territory as far as the yield curve indicator is concerned.

My view for the past half year or so has been much more cautious. While there has been nearly unprecedented Fed tightening (only the 1980-81 tightening was more severe), on the other hand there was massive pandemic stimulus, and what I described on some occasions as a “hurricane force tailwind” of supply chain unkinking. If the two positive forces have abated, does the negative force of the Fed tightening, which is still in place, now take precedence? Or because interest rates have plateaued in the past year, is it too something of a spent force? Since I confess not to know, because the situation is unprecedented in the modern era for which most data is available, I have highlighted turning to the short leading metrics. Do they remain steady or improve? Or do they deteriorate as they have before prior recessions?

First of all, let me show the NY Fed’s Global Supply Chain Index, which attempts to disaggregate supply sided information from demand side information. A positive value shows relative tightening, a negative loosening:

You can see the huge pandemic tightening in 2020 into 2022, followed by a similarly large loosening through 2023. For the past few months, the Index has been close to neutral, or shown very slight tightness.

Typically in the past Fed tightenings have operated through two main channels: housing and manufacturing, especially durable goods manufacturing.

Let’s take the two in reverse order.

Manufacturing has at very least stalled, and by some measures turned down to recessionary levels.  Last week I discussed industrial production (not shown), which peaked in late 2022 and has continued to trend sideways to slightly negative right through February.

A very good harbinger with a record going back 75 years has been the ISM manufacturing index. Here’s its historical record through about 10 years ago (when FRED discontinued publishing it):

And here is its record for the past several years:

This index was frankly recessionary for almost all of last year. It is still negative, although not so much as before.

Two other metrics with lengthy records are the average hourly workweek in manufacturing (blue, right scale), which is one of the 10 “official” leading indicators, as well as real spending on durable goods (red, measured YoY for ease of comparison, left scale):

As a general rule, if real spending on durable goods turns negative YoY for more than an isolated month, a recession has started (with the peak in absolute terms coming before). Also, since employers generally cut hours before cutting jobs, a decline of about 0.8% of an hour in the average manufacturing workweek has typically preceded a recession - with the caveat in modern times that it must fall to at least roughly 40.5 hours:

The average manufacturing workweek has met the former criteria for the last 9 months, and the latter since November. By contrast, real spending on durable goods was up 0.7% YoY as of the last report for January, and in December had made an all-time record high.

But if some of the manufacturing data has met the historical criteria for a recession warning, it is important to note that manufacturing is less of US GDP than before the year 2000, and had been down more in 2015-16 without a recession occurring.

Further, housing construction has not meaningfully constricted at all. The below graph shows the leading metric of housing permits (another “official” component of the LEI, right scale), together with housing units under construction (gold, *1.2 for scale, right scale), and also real GDP q/q (red, left scale):

Housing permits declined -30% after the Fed began tightening, which has normally been enough to trigger a recession. *BUT* the actual measure of economic activity, housing units under construction, has barely turned down at all. In comparison to past downturns, where typically it had fallen at least 10%, and more often 20%, before a recession had begun, as of last month it was only 2% off peak!

The only other two occasions where housing permits declined comparably with no recession ensuing - 1966 and 1986 - real gross domestic product increased robustly. This was similarly the case in 2023.

An important reason is the other historical reason proppin up expansions: stimulative government spending. Here’s the historical record comparing fiscal surpluses vs. deficits:

Note the abrupt end of stimulative spending in 1937, normally thought to have been the prime driver of the steep 1938 recession. Note also the big “Great Society” stimulative spending in 1966-68, when a downturn was averted (indeed, although not shown in the first graph above, there was an inverted yield curve then as well). Needless to say, there as been a great deal of stimulative fiscal spending since 2020 as well.

Fed tightening typically works by constricting demand. Both government stimulus and the unkinking of supply chains work to stimulate supply. 

All of which leads to the conclusion that, while manufacturing has reacted to the tightening, the *real* measure of construction activity has not, or not sufficiently to be recessionary.

Tomorrow housing permits, starts, and units under construction will all be updated. Unless there is a sharp decline in units under construction, there is no short term recession signal at all.