Weekly Indicators for May 6 - 10 at Seeking Alpha

 

 - by New Deal democrat

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

The majority of short leading and coincident indicators continue to show strength rather than weakness. This week it was commodity prices’ turn to show that the global economy is getting stronger.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me with a little pocket change for my efforts.

The Household Survey isn’t the only data series sending up caution flares

 

 - by New Deal democrat

I’ve written two posts earlier this week delving into the big divergence between the Establishment Survey portion of the Employment Report, which shows moderate growth, and the Household Survey, which is most consistent with a recession already having started.

At any given time, some data will be positive and some will be negative. That’s why I follow a whole series of reports with longer term proven reliability. Most of those at present are positive.

But the Household Survey isn’t the only negative data point. 

Here is a graph from six months ago showing the historical record over the past 25 years of both the ISM manufacturing index and the ISM non-manufacturing index. The former has a 75 year history, but the latter was only started 25 years ago and somewhat revised 10 years later:

Since the China shock in particular following its being accorded normal trade relations in 1999, there have been a number of “false positives” in the manufacturing index. But when it has been paired with the non-manufacturing index, measuring services, and the latter has *also* dipped below the 50 mark dividing expansion from contraction, the economy *has* been in recession - with the sole exception of one month in 2022.

Since then, the manufacturing index has been generally improving, although in April it dipped back below 50 to 49.2:

Also in April, the non-manufacturing index dipped below 50 for the second time post-pandemic, to 49.4:

Again, only one month. But worth paying extra attention to. If the non-manufacturing index gives us several more readings below 50 without further improvement in the manufacturing index, that would spell trouble.

Initial claims jolted awake from snooze-fest by highest number in almost nine months

 

 - by New Deal democrat

After several months of snoozing at almost identical weekly levels, initial jobless claims awoke with a bit of a jolt this week, increasing by 22,000 to 231,000, the highest weekly number since last August. The four week average unsurprisingly also rose, by 4,750, to 215,000. With the usual one week delay, continuing claims rose 17,000 to 1.785 million, still one of the lowest readings since last August:

As usual, the YoY% figures are more important for forecasting purposes. The weekly number was higher for the first time in six weeks, by 2.7%. The four week average is still lower by -1.4%. Continuing claims remain higher, by 4.6%, but are still close to their lowest YoY reading in over a year:

Now that we have all of the jobless claims data for April, here’s what the monthly numbers (right scale) look like compared with the unemployment rate (left scale):

To reiterate, we have 60 years of evidence that initial jobless claims in particular lead the unemployment rate. Continuing claims do also with a much shorter lead time, and sometimes they are coincident. With initial and continuing claims close to unchanged YoY, the unemployment rate should move in that direction as well. Now that the last 3.4% reading of the unemployment rate is out of the picture,  and there is only one 3.5% reading left (for July), I continue to expect that the unemployment rate is more likely to decline towards 3.7% than any other direction. As to last week’s renewed 3.9% rate, Paul Krugman has helpfully noted that it was primarily a rounding issue, as one digit further out it rose from 3.83% to 3.87%. In any event, initial claims continue to indicate that the “Sahm Rule” is not going to be triggered in the near future.

A quick scan of this week’s release does not indicate any special issues in any State. Because last year seasonally adjusted claims rose throughout May and remained high during the summer, it is possible there is a residual post-pandemic seasonal adjustment issue. We’ll have to watch and see if this is just a one-off anomaly or the beginning of a longer change of trend.

The Establishment survey portion of the jobs report continued to be positive

 

 - by New Deal democrat

On Monday I wrote that the Household survey portion of the jobs report was recessionary for the second time in three months. But I pointed out that there was a very large divergence in jobs growth in the past 24 months, amounting to 1.7% of the prime age workforce, between that survey and the Establishment survey, one of the largest such divergences on record.

Today let’s take a look at the Establishment survey, which is much more positive.

Every month as part of my look at the jobs report, I look at the leading employment sectors. These are the ones that usually turn down first before the overall jobs market does.

So let’s look at five of those sectors: manufacturing, the sub-sector of motor vehicle manufacturing, construction, the sub-sector of residential building construction, and goods production as a whole.

To begin with, with the exception of the manufacturing data in several months, almost all of these have been positive every month for the entire last year:

That’s pretty positive, especially when we see how this compares with the historical record.

Here’s the YoY% change in each post-pandemic:

Unsurprisingly, per the above, all are positive.

Here is the historical record:

With the exception of 1960 and the two oil shocks of the 1970s, all or at least most of these had turned negative before or just as the recession was beginning. That’s not the case now.

Even before these average hours in manufacturing have turned down, typically by more than -.5 hours YoY. At present, average manufacturing hours are down -0.1:

Here’s the historical record for comparison:

Especially in the past 30 years, there have been about half a dozen times when manufacturing hours have been down more than they are now YoY without a recession occurring.

In short, when we look at the jobs sectors that we would expect to already be suffering before a recession were to start, there are no such signs of distress at present. And since the Establishment Survey is bigger and less noisy than the Household Survey, we should expect the divergence between the two to resolve in the Establishment Survey’s direction.

Q1 credit conditions showed no significant change

 

 - by New Deal democrat

The Senior Loan Officer Survey is a long leading indicator, telling us about credit conditions that typically turn worse a year or more before the economy turns down, and improve just at the economy is ready to turn up.

The big drawback of this series is that the information is only reported Quarterly, and with a one a one month lag. As I indicated in my introductory note yesterday, data for Q1 was released yesterday.

There are two series that have a long enough record to give us a lot of information: whether banks are tightening or loosening standards; and the demand for commercial and industrial loans. 

Let’s look at each in turn.

The first series is the percentage of banks tightening lending standards, meaning that a positive number means more tightening than loosening standards, i.e., positive is worse for the economy. In Q1, there was a slight increase in the percentage of banks tightening credit conditions:

Versus Q4 of last year, in Q1 there was a 1.1% increase to 15.6% in the number of banks tightening standards for large firms, and a 1.2% increase to 19.7% as to small firms. This is similar to what happened in 2002, is not a significant change q/q, and is much lower than the roughly 50% for both metrics back in Q3 of last year. As with Q4, this is consistent with coming out of past recessions.

The story was similar as to the second series, demand for commercial and industrial loans (confusingly, in this one higher does mean better). There was a slight downshift q/q of -1.6% as to large firms and -0.6% as to small firms:

Again, this has been more typical of an economy coming out of a recession than going in to one. 

The Chicago Fed also looks at credit conditions, but their data is weekly and thus much more timely. Here the data has been much more consistently good (these series, again, are ones in which a positive number means “tightening” and so is worse for the economy):

The Index adjusted for “normal” credit conditions has never shown any tightness since the end of the pandemic lockdowns in 2020. The more leading leverage subindex did show tigh contentions after the Silicon Bank failure last year, but has been negative or neutral for the past six months. Note that the leverage index has been more prone to false positives than the adjusted financial conditions index.

Unless for some reason the Fed decides to tighten again, or there is another spate of bank failures, credit conditions are either relatively loose (the Chicago Fed indexes) or “less restrictive” (the Senior Loan Officer Survey), which do not indicate any particular credit stress in the system.

For the second time in three months, the Household jobs Survey was recessionary

 

 - by New Deal democrat

First, a brief programming note. This week is particularly sparse in the new economic data department. The Senior Loan Officer Survey will be reported this afternoon, and on Thursday as usual we get jobless claims. Aside from that, nada. So I might take a day or two off.

But I want to spend some time looking more closely at last Friday’s jobs report(s). I use the plural, because last Friday there really were two very divergent reports. The Establishment report was decent, but as I say in the title to this post, for the second time in three months, the Household Report was what I would expect to see in a recession.

Let’s start by comparing the employment level (blue) with the unemployment level (red). The former did increase by a paltry 25,000, while the latter increased by 64,000. On a YoY basis, the employment level is up 0.3% (blue in the graph below), while the unemployment level is up 13.6% (red, /15 for scale). The graph adds or subtracts the current change so that both show at the zero line):

The next two graphs give the historical view, with the same adjustment:

At no point in the past 75 years have both metrics been at their respective current levels except during recessions. Only twice - in the 1950s - did they come even close.

A similar story is told by the U-3 unemployment rate (blue) and the U-6 underemployment rate (red)(this latter statistic has only been reported since 1994). Currently the unemployment rate is 0.5% higher than 12 months ago, and the latter 0.8% higher:

Again, here is the historical view:

Neither one has ever been this much higher YoY without a recession having already started.

Note that the above is different from the “Sahm Rule,” which is a three month average increase of 0.5% over the 3 month average low in the past 12 months. That metric currently stands at .37%:

With only 4 exceptions (and one near miss) in the past 75 years, even at this level a recession has already been occurring:

Turning to the employment side of the coin, the YoY change in the employment level is slightly below the YoY change in the prime age population, i.e., the number of people who became employed is less than the number of people who on net entered this prime employment demographic:

Historically only 4x in the past 50+ years has this been the case without a recession already occurring or at least imminent, and one of those times was only for one month:

At root the source of this divergence dates back to March 2022. Since then, while the Establishment Survey has indicated that jobs have grown by 4.6%, the Household Survey has indicated only a 2.1% gain:

Indeed this divergence between the two measures, on a YoY population-adjusted basis presently at about 1.7%, has only been matched, and usually only for a month or two, 8x in the past 50+ years:

As the above graph shows, while there is lots of noise, there has always been a reversion to the mean. Normally this is because the noisier Household series converges towards the more stable Establishment survey data. 

I suspect what is going on has to do with the formation and closure of new businesses. There is plenty of evidence that in the immediate aftermath of the pandemic, a record number of new businesses were started. If some of the self-employed at those businesses have attritted back into employment by others, that may explain the disparity. If so, I would expect to see a couple of outsized gains in the Household survey in the months ahead. We’ll see.